Quanta Services Inc (PWR) 2013 Q3 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Quanta Services third quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session, and instructions will be given at that time. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Thursday, October 31, 2013 at 9.30 AM Eastern Time. I will now turn the conference over to Mr. Kip Rupp, Vice President of Investor Relations. Please go ahead, sir.

Thank you Ron. Welcome everyone to the Quanta Services conference call to review third quarter earnings results. Before I turn the call over the 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 e-mail information alerts by going to the Investors and Media section of Quanta Services website at QuantaServices.com. In addition, Quanta has an Investor Relations app for iPhone, iPad, and Android mobile devices which is available for free at Apple's app store and at Google Play. Quanta Investor Relations apps allows users to navigate the Company's Investor Relations materials, including the latest press releases, SEC filings, presentations, videos, audio cast conference calls, and stock price information.

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 recorded on this call speaks only as of today, October 31, 2013, 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 reflected 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 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 report to the Company's Annual Report on Form 10-K for the year ended December 31st, 2012, 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.

Thank you Kip. Good morning everyone. Welcome to the Quanta Services third quarter 2013 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 detailed review of our third quarter results. Following Derrick's comments, we will welcome your questions.

For the quarter, revenues increased approximately 7%, and GAAP diluted earnings per share from continuing operations increased 10% compared to the same quarter last year. Our 12-month and total backlog increased both sequentially, and on a year-over-year basis, and both are at record levels. Our electric power segment continues to experience strong demand for electric transmission and distribution services. The electric power industry continues to make significant investment in North America's power grid to improve reliability, address congestion issues, create renewable interconnections, and upgrade and replace aging transmission and distribution infrastructure. There are several near-term drivers of transmission spending.

As coal generation is retired to comply with the Environmental Protection Agency's Mercury Air Toxic standards, utilities will need to modify existing transmission infrastructure to handle changes in energy flow to maintain grid reliability. As a result, new transmission infrastructure will be required. For example, earlier this year grid operator PJM, which manages grid reliability on an electric power system that serves more than 60 million people, identified the need for more than 130 grid upgrades to avoid reliability problems results from power plant retirements. PJM's estimate of $2.4 billion in expenditures to address this challenge includes equipment upgrades, new substation and substation upgrades, as well as rebuilding existing transmission lines and the construction of new lines. Earlier this month, PJM approved an additional $1.2 billionin high voltage transmission system upgrades, and improvements to meet the challenging impacts of mother nature, such as Superstorm Sandy, and the ongoing reconfiguration of the grid associated with the shift from coal to natural gas generation. We are also seeing significant growth opportunities throughout Canada, and expect this trend to continue for several years.

The drivers of transmission and distribution investment in Canada are similar to the United States, and also include other drivers such as the development of new or expanded hydro generation facilities, generating power to meet low growth demands in Canada, and for export into the US market. The current level of bidding activity on large transmission projects remains at high levels. Forexample, during the third quarter, we were selected by PPL to construct approximately 69 miles of 500-kilovolt electric transmission infrastructure through environmentally-sensitive and challenging terrain in Pennsylvania. Work has begun on this project, and we expect to complete the project in the spring of 2015. As the industry leader in North America, we continue to have ongoing discussions with many customers, and have good visibility into future opportunities.

We anticipate that several large transmission projects will be awarded in the coming months. Keep in mind, for every large transmission project opportunity there are a significant number of sub-transmission and substation project opportunities. Construction associated with projects individually valued at less than $100 millionremains strong, and we do not anticipate any slowdown in activities for the foreseeable future. Our propriety energized services technology and work methods are being utilized by AEP to perform a 345-kilovolt energized reconductor and transmission project near Corpus Christi, Texas. Quanta is performing thiswork in an energized state to avoid service outages to AEP's customers during construction. The 66-mile project represents the longest span of transmission line in the United States ever rebuilt while remaining in an energized state, and is the first of a 5-phase 266-mile program. The second phase of this project is expected to begin in mid-November, and was not reflected in our September 30th backlog.

The substantial emergency restoration service work performed in last year's third quarter as compared to this year's third quarter was the primary reason for electric power segment revenues being down slightly in the quarter. However, excluding the impact of emergency restoration work in both quarters, our electric distribution activity increased in the third quarter, and we expect growth to continue through this year and in 2014. We continue to add distribution crews for existing and new customers. Our distribution workforce has increased 50% over the past 18 months.

The major drivers of our distribution services are storm hardening initiatives, upgrading aging infrastructure, and housing recovery in certain parts of the country. Overall for our electric power segment we believe our current backlog, coupled with project opportunities on the horizon can lead to double-digit growth opportunities for at least the next two years. Our natural gas and pipeline segment revenues increased substantially this quarter versus the third quarter of last year, and operating income more than doubled from the same period last year, resulting in a significant improvement in operating margin for the segment. We are pleased with the segment's ongoing profitability improvements as it reflects continued awards, solid execution, and contributions from our efforts to expand geographically.

Demand for pipeline services to support shale gathering infrastructure was active in the third quarter, and should remain so through the year and for many years to come in the future. As customers continue to invest in infrastructure needed to support the development of unconventional shales, particularly liquid rich formations. We also commenced construction on two mainline projects in the third quarter. While these projects started slightly later than anticipated during the quarter, our forecast continues to include an expectation of $100 million in mainline revenues in the second half of this year in North America.

Also as recently announced, Quanta was selected by TransCanada for the Houston lateral pipeline project. Quanta's Price Gregory operating unit will construct and install approximately 48 miles of 36-inch diameter steel pipe to interconnect TransCanada's Gulf Coast Pipeline to refineries in Houston, Texas. Price Gregory has a limited notice to proceed on this project, and we expect a substantial majority of this project to be performed early next year with completion in the spring of 2014. We remain in active discussions with a number of pipeline companies regarding mainline projects, and are bullish on this market. As we have stated in the past, we believe that mainline pipe project awards in the United States, Canada, and Australia will continue through and could accelerate in 2014.

Subsequent to the quarter, we acquired T G Mercer, which is based in Willow Park, Texas. Founded in 1910, Mercer specializes in pipeline logistics for the oil and gas pipeline construction industry. Mercer's field offices are strategically located in and near key shale plays in the United States. Mercer has developed a propriety pipe tracking system that enables pipeline owners to effectively track information pertaining to pipe infrastructure from the mill yard to final construction. This system provides pipeline owners with a solution to address growing regulatory concerns regarding traceability of information pertaining to their pipeline infrastructure. Mercer's industry leading pipeline logistics and propriety technology, coupled with Quanta's leadership position in pipeline construction, maintenance, and integrity services, enhances our turnkey service offerings which we believe is unmatched in our industry.

In our Fiber optic licensing and other segment, revenues from the quarter decreased about 10% as compared to the prior year, due to the fluctuations in Telecom service revenues. Within the segment, however, we continue to see strong demand for our fiber optic services across all of our markets, and from a wide variety of industries, including healthcare, media and entertainment, financial services, education and government, as well as wireless and wireline carriers. There is continued appetite for increasing bandwidth for business continuity, cloud computing, data center connectivity, and private wide area network services. We continue to invest in our network to expand our service offerings to meet our customers demands, and to capitalize on new opportunities in the marketplace.

It is a dynamic time in the industries we serve, and we see a clear opportunity for profitable growth. One of our key strategic objectives is to leverage our leadership position, and move into select new geographies and adjacent service lines. Over the years, we have strived to stay two to three years ahead of industry trends, enabling Quanta to capitalize on opportunities. We have successfully launched our renewable energy engineering procurement and construction services group in 2008, we acquired a North American leadership position in pipeline construction in 2009, in 2010 we acquired Valard Construction, the leading electric transmission and distribution company in Canada, and we have subsequently completed the acquisition of several other Canadian T&D contractors. We acquired a pigging technology for Pipeline Integrity Services in 2011, and made a sizable acquisition of a pipeline construction company in Australia in the third quarter of this year.

Today, we are announcing an expansion into infrastructure services serving the offshore and inland water energy markets. We believe there are meaningful opportunities for us to penetrate these markets, and replicate the services we perform today onshore. We are following several of our existing customers who own assets both onshore and offshore, and we are utilizing Quanta's expanded service offerings to secure new customers both onshore and offshore.

Demand for offshore pipeline infrastructure services is very similar to that on land, as the vast majority of thousands miles of pipeline in related production facilities are at or beyond their useful life. We believe the continued stringent regulatory environment that has affected our onshore customers will impact the offshore industry and should accelerate customer actions to address aging infrastructure. We believe the offshore oil and gas industry is growing, and a vibrant market. However, we believe the infrastructure service providers in the offshore market lack the ability to provide sole sourced solutions, including differentiated technologies that many customers desire. We see a clear opportunity for Quanta to grow in this market.

An integral part of this strategy was Quanta's recent acquisition of Performance Energy Services, or PES, which is headquartered in Houma, Louisiana. PES is a leading specialty contractor to the oil and gas industry, specializing in mechanical installations, fabrication of steel structures, commissioning and decommissioning services, and electrical instrumentation services. PES is ISO 9000 certified, and serves the Gulf of Mexico market, and also has a presence in select international offshore markets serving US exploration and production companies.

In addition to the PES acquisition, Quanta has invested $24 million in certain multipurpose construction vessels to enhance our offshore oil and gas infrastructure strategy. These vessels compliment the service offerings of PES, as well as our existing service offerings. The PES and Mercer acquisitions are included in our natural gas and pipeline segment on examples of our efforts to enhance our comprehensive infrastructure solution offerings for our customers, and expand into adjacent markets that we believe will deliver profitable growth for our shareholders.

In summary, we had an excellent third quarter, and we expect 2013 to another record year for Quanta .We believe the momentum continues to build in all of our end markets, and we believe there is an opportunity for double digit growth in 2014. Our employee count at the end of the quarter stood at a record 21,000 employees, up 18% from the beginning of this year. I want to thank our employees for their dedication to safety and their hard work. I believe we have the very best employees in the industry, and our people are the key to our past and future success.

I will now turn the call over to Derrick Jensen, our CFO, for his financial review of the third quarter. Derrick.

Thanks Jim, and good morning everyone. Today we announced revenues of $1.65 billion for the third quarter of 2013, compared to $1.53 billion in the prior year's third quarter, reflecting growth of approximately 7% quarter-over-quarter. Net income from continuing operations attributable to common stock for the quarter was $92.9 million, or $0.43 per diluted share, as compared to $83.6 million, or $0.39 per diluted share in the third quarter of last year.

Included in our results for the third quarters of 2013 and 2012 were the release of income tax contingencies of approximately $6.6 million and $5.2 million of income, or a net benefit of $0.03 per diluted share for the third quarter of 2013, and a net benefit of $0.02 per diluted share for the third quarter of 2012. Both were due to the expiration of various federal and state statute of limitation periods, and settlement of certain income tax audits. Adjusted diluted earnings per share from continuing operations, as calculated in today's press release, was $0.46 for the third quarter of 2013, and grew approximately 10% as compared to adjusted diluted earnings per share from continuing operations of $0.42 for the third quarter of 2012.

The growth in consolidated revenues in the third quarter of 2013 was primarily due to a 40% increase in revenues from our natural gas and pipeline infrastructure services segment, partially offset by a 4% decrease in revenues from our electric power infrastructure services segment. Our consolidated gross margin increased to 16.6% in the third quarter of 2013, from 16.4% in 3Q 2012. The increase in gross margin was primarily a result of improved performance and an increase in revenues from our natural gas and pipeline segment in this year's third quarter as compared to last year's third quarter. This increase was partially offset by a $57 million quarter-over-quarter decrease in higher margin electric power emergency restoration services revenue.

Selling, General & Administrative expenses were $124.9 million, reflecting an increase of $10.4 million as compared to last year's third quarter. This increase is primarily attributable to $6.5 million of higher salary and incentive compensation costs associated with increased levels of operating activity and profitability. Also contributing to the overall increase in selling, general, & administrative expenses was approximately $4.1 million in incremental and administrative costs related to acquired companies. As a percentage of revenues, selling, general & administrative expenses increased slightly to 7.6% in the third quarter of 2013, from 7.5% in the third quarter of 2012.

Our consolidated operating margin before amortization expense remained constant at 9% for Q3 2013 and Q3 2012. Amortization of tangible assets decreased from $10.3 million in Q3 2012 to $7 million in the third quarter of 2013, primarily due to reduced amortization expense from previously acquired intangible assets, as certain of these assets became fully amortized, partially offset by amortization of additional intangible assets associated with the 2013 acquisitions. To further discuss our segment results, the electric power segment's revenues were $1.05 billion, reflecting a decrease of $40.2 million quarter-over-quarter, or approximately 4%. Revenues were negatively impacted by a $57 million decrease quarter-over-quarter in emergency restoration services, with approximately $18.6 million occurring in the third quarter of 2013, compared to $75.1 million occurring in the third quarter of 2012.

Additionally, revenues during the quarter were negatively impact by a decline in activity related to renewable energy projects, as the prior year's third quarter had substantial contributions from a large scale solar project. In the third quarter of 2013, we neared completion on some smaller renewable projects, but due to the lumpiness on projects in this area, we have had few new awards. These decreases were partially offset by higher revenues associated with the electric power transmission and distribution projects that resulted primarily from increased capital spending by our customers. Also included in the overallincrease in revenues for the third quarter of 2013 are approximately $27.5 million in revenues from companies acquired in 2013.

12-month and total backlog increased both quarter-over-quarter and sequentially for the electric power segment. Sequentially, 12-month backlog increased by 9% from the end of the second quarter in 2013, and total backlog for this segment is at a record $5.32 billion. Contributing to the increase in backlog is roughly $100 million fromacquisitions in the third quarter. In addition, backlog increased due to incremental transmission awards, as well as the renewal of certain master service agreements.

Operating margin in the electric power segment decreased to 11.7% in the third quarter of 2013, as compared to 12.6% of last year's third quarter, primarily due to the lower levels of higher margin emergency restoration services in the current period, as well as last year's third quarter being positively impacted by higher margin contributions from the large scale solar project, which did not recur in the current period. Natural gas and pipeline segment revenues increased quarter-over-quarter by 40% to $552.4 millionin Q3 2013, primarily as a result of increased revenues from projects related to unconventional shale developments in certain regions of North America. Revenues for the third quarter of 2013 were also favorably impacted by the contribution of approximately $56 million in revenues from the acquisition of Nacap in late July of 2013.

Operating income for the natural gas and pipeline segment as a percentage of revenues increased to 9% in Q3 2013, from 5.9% in Q3 2012. The increase is due primarily to continued successful execution on higher revenues, the combination of mainline activities from Nacap, and to a lesser extent the start of the mainline project that Jim referenced earlier, as well as overall increase in segment revenues, which improved this segment's ability to cover fixed and overhead costs.

Similar to the electric power segment, backlog is higher both quarter-over-quarter and sequentially for the pipeline segment, with 12-month and total backlog increasing 34.8% and 8.2% compared to the end of the second quarter of 2013. These increases are primarily due to backlog associated with the Nacap acquisition. Also, as we have commented before, Keystone XL is not in any of the backlog figures presented for our pipeline segment.

Fiber optic licensing and other segment revenues were down $4.8 million, or 10% to $44.4 millionin Q3 2013, as compared to $49.2 million in Q3 2012, primarily due to lower levels of ancillary telecommunications service revenues. However, operating margin increased to approximately 31.8% in Q3 2013, as compared to 30.7% in Q3 2012, as a result of a larger proportion of fiber optic licensing revenues earned during Q3 2013, which yielded higher margins than the ancillary telecommunications and wireless infrastructure projects underway in Q3 2012.

When calculating operating margins by segment, we do not allocate certain general and administrative expenses and amortization expense to our segment. Therefore, the previous discussion about operating margins by segment excludes the effects of such expenses. Corporate and unallocated costs decreased $3.5 million in the third quarter of 2013 as compared to Q3 2012, primarily as a result of a $3.3 million reduction in amortization expense, as previously acquired intangible assets became fully amortized, partially offset by amortization related to 2013 acquisitions. EBITA for the third quarter of 2013 was $141.8 million, or 8.6% of revenues, compared to $132.8 million,or 8.7% of revenues for the third quarter of 2012. Adjusted EBITDA was $185.8 million, or 11.3% of revenues for the third quarter of 2013, compared to $171.4 million, or 11.2% of revenues for the third quarter of 2012. The calculation of EBITA, EBITDA, and adjusted EBITDA, all non-GAAP measures, and the definitions of these and day sales outstanding, or DSOs, can be found in the Investors and Media section of our website at QuantaServices.com.

Operating cash flow from continuing operations was approximately $83 million for the third quarter of 2013, as compared to cash used of $47 million for the third quarter of 2012. Capital expenditures net of proceeds from equipment sales were about $47 million, resulting in approximately $37 million in free cash flow for the third quarter of 2013. This compares to $112 million in negative free cash flow for the third quarter of 2012. Also during the third quarter of 2013, we acquired J.W. Didado Electric and Nacap Australia in unrelated transactions, which included the use of approximately $118 million in net cash.

The improvement in operating cash flow from continuing operations for the quarter was primarily due to higher overall levels of operating activity and performance improvements, as well as decreased working capital requirements on certain projects during the 2013 period as compared to the 2012 period. Our DSOs were 82 days at September 30, 2013, compared to 93 days of June 30, 2013, and 91 days at September 30, 2012. Contributing to the decrease in DSOs was the favorable impact of 9 days from reclassifying the change order receivable balance of $165 million on the Sunrise Power Link project from current assets to other long-term assets. Since completion of the project, PAR Electric, a Quanta sub-subsidiary, and STG&E have had ongoing meetings to review project scope, cost and performance criteria, in order to reach resolution on the additional work performed and pricing of our change order.

As of early October, we were unsuccessful in agreeing on the amount owed to PAR, and as a result, have recently agreed to submit the change order to formal arbitration, as per the contract. While the total change order being pursued by Quanta with respect to this matter is higher than the amount presented on Quanta's balance sheet, management has taken a more conservative position with respect to its financial statements, and continues to believe that the Company will be successful in collecting the amount recognized.

At September 30, 2013, we had about $226 million in letters of credit outstanding, primarily to secure our insurance program, and we had no borrowings outstanding under our credit facility. In addition, at the end of the quarter, we had approximately $309 million in cash, with approximately $184 million of the balance related to foreign operations. Considering our cash on-hand and availability under our credit facility, we had nearly $783 million in total liquidity as of September 30, 2013. As Jim previously commented, subsequent to the end of the third quarter, we completed two additional acquisitions in our pipeline segment, for aggregate combined considerations of approximately $181 million, of which approximately $125 million was paid with cash on hand and short-term borrowings under the credit facilities.

In consideration of Quanta's acquisition strategy and continued approach to leveraging our balance sheet capacity on larger scale infrastructure projects, we also amended our revolving credit facility yesterday to increase our availability under the facility to $1.325 billion, and extended the maturity date to October 30, 2018. Concerning our outlook for 2013, we expect revenues for the fourth quarter of 2013 to range between $1.65 billion and $1.75 billion, and diluted earnings per share from continuing operations to be $0.39 to $0.41 on a GAAP basis. Included in our estimate of GAAP diluted earnings per share for the fourth quarter of 2013 is a net tax benefit of approximately $0.02 per share, associated with the release of certain income tax contingencies, due to the expiration of certain statute of limitations periods during the fourth quarter.

In addition, the Company's outlook for the fourth quarter of 2013 continues reflect nominal emergency restoration service revenues as compared to the fourth quarter of 2012, which included record emergency restoration service revenues of over $130 million. These estimates compared to revenues of $1.67 billion in GAAP diluted earnings per share from continuing operations of $0.48 in the third quarter of 2012, which also included a $2.7 million benefit from the release of income tax contingencies, impacting the prior year fourth quarter by $0.01 per diluted share.

Our GAAP EPS forecast for the fourth quarter of 2013 includes an estimate of $7.6 millionfor non-cash compensation expenses, and $9.5 million for amortization expense. Excluding these expenses and the impact of income tax contingency releases, our non-GAAP adjusted diluted earnings per share from continuing operations for the fourth quarter of 2013 are expected to be $0.42 to $0.44, and compared to our non-GAAP adjusted diluted earnings per share from continuing operations of $0.51 in the fourth quarter of 2012. This non-GAAP measure is estimated on a basis similar to the calculations of historical adjusted diluted earnings per share from continuing operations presented in our release.

We are currently forecasting net income attributable to non-controlling interests to be approximately $4 million to $5 million in the fourth quarter of 2013, for additional guidance, we are currently projecting our GAAP tax rate to be around 33% for the fourth quarter, and our diluted share count to be about 217 million shares. We expect CapEx for all of 2013 to be approximately $260 million to $270 million, which includes CapEx for our proper licensing and other segment of about $45 million to $50 million, as well as an increase associated with the $24 million in vessels that Jim previously discussed. This compares to CapEx from continuing operations for 2012 of about $209 million.

This concludes our formal presentation, and we will now open the line for Q&A. Operator.

Thank you. (Operator Instructions). Your first question comes from William Bremer from Maxim Group. Please go ahead.

Very nice quarter, gentlemen.

Thank you, Bill.

Can we talk a little bit on pricing, what is currently in your backlog now for each segment? Has that been proving sequentially or year-over-year? Just give me a little sense on the pricing power of the end markets that you are working on now?

Sure Bill, this is Derrick. Relative to pricing, we like to look at things as though we have the same level of pricing discipline throughout, so what I would say is with the margins that we are seeing in backlog today, are comparable to the margins that you have seen in both electric power and in the pipeline segment.

Now, let's go into international. Can we get an update on Australia? There is something a little bit on the newer side in terms of your business mix. What you are seeing there? Also, touch base on the offshore opportunity for you, and give us a sense what is the current capacity that you could do there, and I am sure you will be investing with that continuously as projects come up, but a little more granularity would be appreciated?

Okay, first, Australia, Bill, we are seeing similar drivers that we are seeing the US, probably moreso than in the US and in Canada. There is significant opportunity to build out the pipeline infrastructure, and certainly we are at or ahead of schedule on where we expected to be when we made the acquisition, so things are moving along nicely there. As far as the offshore environment, what we are try doing is replicate the services that we are performing on land today offshore, the main reason we are doing that is some of our primary customers that we are doing work for on their pipeline infrastructure and facilities on land, have asked us to move into the offshore environment because they don't feel they have got a viable solution with the amount of work that they have got going forward.

We thought Performance Energy is an excellent company that has a strong management team and customer relations that has differentiating services in the Gulf primarily today, and certain international markets, and we are going leverage that with some of our technologies in-house, such as our integrity services, our engineering capabilities and program management to build that business, so we are very excited about that opportunity. Certainly, we are just getting our toe in the water on that, and we will just take it slowly and build opportunities with our customers as they present themselves.

Your next question comes from Will Gabrielski with Lazard Capital. Please go ahead.

Thank you very much, and nice quarter. As you look at the offshore market, can you comment, it sounds like the part of the marketthat you want to address is fairly fragmented from your comments, is that true? How do you view this work? Is it more MSA style work and recurring opportunity, or will it be discreet projects?

A significant part of what PES does today is MSA work. It is recurring revenue with margins that are actually better than what we do in ourcore business today. There are other parts of that business that are adjacencies that are highly fragmented that lack technology, and a sole sourced solution that we see an opportunity to provide going forward.

Okay. Can you give some color up in the Canadian market, just over the past 48 hours, a big few oil sands projects were sanctioned, and there seems to be some pipelines associated with those, how that market is shaping up on the pipeline side for you, and what the opportunity and competitive landscape looks like?

The competitive landscape there is less than the US, because they just don't have the industry capacity in Canada that they do in the Lower 48. We anticipated that the Canadian pipeline market was going to be strong in the future years, that is one of the reasons that we have been bullish on our commentary, and the recent announcements that you have seen, I believe you are referring to the Enbridge announcement that just came out, is the primary, one of the drivers. We have a significant presence in Canada. I think that we are probably one of the leading if not the leading contractor in Canada, and we are well-positioned to take advantage of those opportunities.

Your next question comes from Tahira Afzal with KeyBanc. Please go ahead.

Good morning, gentlemen, nice quarter.

Thanks, Tahira.

First question is in regard to, Jim, something you said about 2014. Typically you guys are pretty conservative as you look out, but I guess your backlog has grown fairly notably. Could you elaborate a little bit on that double-digit qualitative on the commentary you gave for 2014? Is that in regards to what you think the revenues can do, or whether that the earnings growth you see going into next year? Really what gives you the confidence that you seem to be indicating in regards to that?

Well, Tahira, we are seeing continued momentum in all portions of our business, so we see top line growth, we see solid execution which we have demonstrated over the past several years. Derrick talked about backlog and the margins in backlog, so everything is leading toward a growth year in all aspects of our bottom line and revenue growth, and so forth, so we are excited about the opportunities going forward. That is why we have been bullish as early as, typically we are not bullish until February about these comments, but we just see clear visibility going forward into 2014 today, than we have into the past at this time going into any given year.

Got it. The second question I had was really in regards to the acquisition commentary. Jim, it seems like with the capacity increase in your revolver, perhaps, and your commentary today, you are looking at doing something more sizeable as we go into 2014, could you make us a little bit more comfortable around the offshore opportunities you might be looking at there? We kind of have a mixed record in terms of some of the offshore names that we cover, becausethe pipelines on the subsea side sometimes tend to have more risk associated with them. Anything at all on the risk side would be helpful. Thanks a lot.

Let me be clear that the expansion of the credit facility is not associated with our move into offshore. Made comments that we are going to take it slow and steady moving into the offshore environment. The expansion of the credit facility is for the typical reasons that we have mentioned in the past. It is working capital in all segments of our business, as we continue to grow and it is capital for acquisitions across all segments, as well as CapEx for growth. Those are the primary reasons, but it is not because we're trying to make some big play into oil and gas, that is not accurate whatsoever, and I am glad that you asked that question because I am sure that there are some concerns about that out there, but that is not what the use of that credit facility is for.

Your next question comes from Vishal Shah with Deutsche Bank. Please go ahead.

Thanks for taking my question. I just wanted to clarify your comments on the margins in the bookings as the margins in pipeline and transmission segment. You say that they were consistent with third quarter margins? And I have a follow-up.

This is Derrick. Our margins that we are seeing in backlog on the pipeline segment are consistent with the historical bidding margins that we have. From the perspective of, we target 9% to 12% from an operating prospective, which is inclusive of the costs that we incur, but that is not necessarily representative of the margins that we are bidding. The margins that you see from the bidding side of the equation and what is in the backlog are consistent with our bidding approach historically.

Okay, that is helpful. Can you just talk a little bit about the transmission segment, how your book to bill would look like in the US versus Canada, and also your expectations for growth in 2014 in both of these markets?

Yes. We continue to see opportunities in the US and Canada, comparable. I think the growth rate in Canada has the ability to be maybe slightly higher, simply because of the fact that it is growing on a smaller base, but the overall award activity between the US an Canada is comparable. Then I think the second part of your question was really as it relates to 2014. I think that we continue to see margins within the segments, specific electric power in that 9% to 12% range that we continue to see throughout this year, you are seeing it in the performance at the 11% range, but as we look forward, I continue to say that overall a 9% to 12% range is what we feel comfortable with.

Your next question comes from Jamie Cook with Credit Suisse. Please go ahead.

Hi. Good morning. Can you hear me?

Yes, Jamie, good morning.

Good morning. Just a couple questions, question one on the quarter specifically. It was a fairly good quarter. The revenues were sort of at the low end of what you guided. Can you just talk about was there anything different than your expectations? The electric power revenue struck me as a little light, relative to what I thought, but I don't know if that was just me.

I guess my second question, again on the electric power margin. Is there any reason, if we look at the margins in the first nine months relative to where you were last year, I understand there is less storm work, but as I look sort of to 2014, is there any reason structurally, assuming that execution margins could exceed or be toward more of the higher end of the range, or does mix from distribution or smaller projects bring the margin profile down in the fourth? Thanks.

Jamie, relative to the revenues wedge did have some delay from the third quarter out associated with some of the transmission work up in Canada. It got a little bit later start than we anticipated. On a consolidated basis, we also had a little bit of delay on mainline, it came through those few projects that started three to four weeks, a little bit later than what we anticipated. That is some of what pushed some of the revenues out, and ended up putting us at the lower end of our revenue guidance.

When thinking about 2014 and the margins, as I said earlier, we continue to look at the 9% to 12%. Do I think that we could be at the higher end of that range throughout from the normal prospective, I would say yes, but then you talked about the growth to distribution. Distribution historically may have been at a little bit lower margins, but we continue to push ourselves into additional program management solutions, and providing additional solutions to our customers, which move us up the value chain with them on the distribution side, so I think that we actually look at being able to push the margins and distribution up a little bit more than what we have seen historically.

Okay, thanks, I will get back in queue.

Your next question comes from Steven Fisher with UBS. Go ahead.

Good morning.

Good morning.

Jim, on the electric transmission figure prospect you mentioned in the next few months, what is driving the confidence in the projects in timing? Have they gotten all of the regulatory and permitting issues behind them?

There are some projects that are in the final stages of trying to get permitting, and we see that on every project, which could affect the timing, whether it gets awarded at the end of this year or in the first quarter of next year, but we do see two to three big projects that could be coming out here in the near term, that we don't expect any major hurdles for those projects to move toward construction in 2014.

Okay. Then on the pipeline. We are heading into what was the more traditional bidding season for the larger pipelines. Do you think that seasonality holds for those bigger main lines? What is your base case for when we could see more of these main lines get awarded?

We have said in the past, this traditional bidding season that we have historically seen over the past, probably last year and this year has really kind of gone away. It is kind of like a year-round process now that occurs, so there is really no bidding season. It is more having discussions with customers on these bigger programs, and they could be let at any time during the year, so I wouldn't focus so much on the bidding season any more. It is just not,that dynamic just isn't occurring as it has historically.

Your next question comes from Andy Whittman with Robert W. Baird. Please go ahead.

Hi guys, you touched on this question a little bit already, but in the new business and the offshore stuff, you mentioned that it is MSA or MSA-like, does that mean it is not fixed pricing it is done on a reimbursement basis? I just want to get a little bit better sense of what that risk profile looks like?

A lot of it is crews that are working on these production platforms maintaining the electrification and instrumentation and mechanical maintenance of the platform, so those folks are typically on some type of fixed fee basis, that on a seven day on, seven day off basis, whatever, it is year-round work. It is MSA work that the margins are predictable, and they are certainly accretive to the Company as we stand today.

Got it. Then you mentioned that in the electric segment that there is an MSA renewal. You don't say that every quarter. How much is the MSA backlog up sequentially? Just give us a better sense about how much the MSA contribution was contributing to the backlog this quarter?

I don't know that I would say how much the MSA backlog was up per se, but I will tell you that of the non-acquisition related backlog, the remaining competes was probably roughly half of it was MSA work, and most of that is in the beyond 12 period.

Your next question comes from Dan Mannes from Avondale.

Good morning everybody.

Good morning Dan.

A couple of quick follow-up questions first. You mentioned, Jim in your prepared comments that you picked up the work from PPL. Without going into the details of this one, can you talk a little bit about maybe historical precedent for replacing other contractors, number one, and your positioning there? Then secondly, why would that occur in the first place without specificallytalking about this one?

It is difficult to get into that. We don't typically know the reasons why we get put on projects, because why other people might get replaced. There could be various reasons for that. I don't want to get into that, Dan. What is exciting for us is that we were called in to help finish the project, and I believe we are doing very well on that project. We are all ahead of schedule and we are excited to build that relationship with PPL, and do more work for them going forward.

Okay, I just wanted to see if this was something that had happened in the past to other contractors, and if this has been something that you had been a beneficiary, not just this time, but maybe historically as well?

We have replaced folks in the past on projects, and that has happened recently over the last several years because of the uptick in work. Labor is tight, the experienced leadership is tight, and certainly some of these projects are becoming more difficult to complete because there are aggressive time frames, more difficult terrain and more populated areas, so certainly that is in our sweet spot from an execution standpoint, and we have replaced contractors over the last several years to finish projects.

Your next question comes from Adam Thalhimer with BB&T Capital. Please go ahead.

Good morning guys, I would also say, congratulations on a good quarter.

Thank you.

Jim, I wanted to ask you about, you have talked about this in the past, your strategy in the pipeline business was to I think let others fill up on the early work, thinking that might be lower margin, then hold back some capacity for the later bidding. Maybe you could reflect on that strategy, and where are you in that cycle?

Adam, I don't know if that is exactly right. I think what we do is we are disciplined on pricing. We have got several of our customers that we have more strategic relationships with that have more difficult builds in geographic areas where we typically excel, that have come out later than some of our other projects that came out earlier last year. It is just the timing of when projects in certain geographical areas come up, and when our key customers start their build programs, more than waiting and holding capacity. Certainly, if there is a project for anyone that meets our margin profiles, we are going to take advantage of that opportunity.

Okay. Second question, I wanted to ask about the, Jim, your long-term outlook for offshore oil and gas, and I guess the question from me, is how did the production costs offshore compare to production costs onshore? I don't know much about onshore, but you would just think that with all of the development of onshore, that offshore would be in secular decline, but maybe that is totally false? I really don't know.

I want to say this again, we are not changing the profile of the Company. We are taking advantage of an adjacent market opportunity. This isn't any big shift in strategy. It is a natural progression, as we follow our customers into an opportunity that we believe we can execute on. When you look at the cost profile of this business, certainly we believe that it is going to be more profitable than our core business today, and PES is a good example of that. Their margins are higher than our core business today, and their return on invested capital is higher than our margins today. I just want to make another comment that our primary services is not to be a marine support to provide customers with marine support activities. We see opportunities to provide solutions using technology and leverage our capabilities in-house today, and the marine vessels are just one aspect of supporting that. This is going to be very limited. We are not going out and buying a bunch of vessels. We are here to support our customers in providing solutions that we don't believe are in place today, where our customers have comfort that there is a contractor that can provide those solutions today.

Your next question comes from Craig Irwin with Wedbush Securities, go ahead.

Good morning gentlemen. Congratulations on the strong quarter.

Thank you.

Thank you, Craig.

In your outlook statement in your release, you lead off with an indication that there might be some regulatory or permitting risks in the fourth quarter. My understanding is previously you had looked to include a little of these potential risks in your guidance. Can you comment as far as whether or not anything has changed, or if there is anything specific or unique that you are looking at in the fourth quarter, and why you would choose to put something in versus out, given that there might be a little bit of risk?

Craig, we usually put that statement in our outlook every quarter. It is just the nature of our customers always have delays, projects never start on time. It has been like that for decades, and I don't see anything material or different. In fact, I think the environment is probably better today than it has been quite some time, but we deal with delays all of the time. We have two or three of our big transmission projects that are delayed right now, but people don't see that because we are on 16 major transmission projects, but delay is just something that we have to deal with, our customers have to deal with, and that is why it is in the outlook, and it will be in there in the future as well.

Great. Then the next question is really just a housekeeping question. Can you maybe share with us the mainline gas contribution in the quarter to bookings, revenue, backlog, and where we stand on those numbers?

Yes, we don't typically get into the specifics of, the quantification of how much revenue came from that subsegment, and in relation to backlog, I am not certain I understood your question. I think you are just asking how much of the incremental awards were mainline?

Yes, that would directly answer it, yes.

Okay. As it stands right now, we also don't go through and really get into that level of detail on the specifics of how mainline works. Our mainline is a component of that. The reality is that the increase in backlog quarter-over-quarter is really all associated with Nacap in the pipeline group, and Nacap's revenues are historically mainline.

TransCanada is not in backlog yet, since that was announced subsequent to the quarter. So that will be added at the end of the fourth quarter.

Your next question comes from John Rogers with Davidson. Please go ahead.

Good morning.

Good morning, John.

Jim, could you talk a little bit about where you are on the pipeline capacity utilization? Derrick had mentioned that you are pretty disciplined on pricing, but you have seen margins climb quite a bit, and is that just better utilization of what you have? Kind of where are we, and how much excesscapacity do you still have going into 2014?

I wouldn't say we have excess capacity right now. If you remember, we deployed our field leadership into the shales, and we have been very active in the shales doing gathering work, probably generated over $1 billion in gathering revenues. Now the mainline work is beginning to accelerate, and that does help, obviously leverage some of the fixed costs we have on specialized pipeline, large diameter pipeline handling equipment, so certainly we have the ability to expand the spreads that we have to take advantage of opportunities. Strategically we have been planning this move and the increase in mainline activity while remaining in the shales, working for the customers we are working for today, so I wouldn't say that we have got excess capacity sitting around. Certainly we have an opportunity to take advantage of mainline pipe as it comes out over the next several years.

But, Jim, if you can expand the spreads, not an exact number, but can you give us a sense of how much more work you can do with your capacity that you have now? I am thinking about TransCanada hopefully starts up, or Keystone starts up?

We have nine to twelve spreads of capacity in the Lower 48, and right now we are on a couple of jobs, so certainly we have got the capacity to move, to take on more opportunities in the Lower 48. We have certainly got Australia, don't forget about that. I mean, Australia and Canada, there are certainlyopportunities for growth there, too. We have capacity in those areas as well to take advantage of growth opportunities, so we are well-positioned to take advantage of growth. If there is an opportunity, being the largest specialized contractor in the industry, if there is a will, there is a way. We will be able to man those projects. We are not concerned right now about having limitations on pursuing additional work. We are not going to turn down work for our key customers, or for any project that has margins that meet our profile.

Your next question comes from Alex Rygiel with FBR. Please go ahead.

Good morning, Jim and Derrick, how are you today?

Hey Alex.

Good.

Good. Great quarter. Congratulations. Very excited about the backlog growth, very excited about the pipelinemargins being the highest in the last couple of years, and obviously your commentary about bidding in the next quarter or so with regards to transmission and pipeline all very bullish. You have answered most of the questions out there, but I did want to find out a little bit more color on the timing of the Sunrise arbitration? How should we think about that over the next 6 to12 months?

To the extent that we have moved it non-current, that is a direct statement that we are not anticipating any settlement within the next 12 months. I would think in my own mind that is probably something within the 18 to 24 months time frame.

That is perfect. And then Jim, as it relates to sort of other acquisitions in the offshore arena in the near-term. Is that something we should be expecting, or is this initial acquisition sort of an acquisition that you will use to test the waters for the next year or two to see how much further you want to go?

Yes, I think latter is the more accurate. PES is a nice platform to grow on, we may do some smaller selective type acquisitions, but it is going to be more around technology-driven opportunities versus trying to build more mass. I don't see any big acquisitions in oil and gas in the near future.

Your next question comes from the line of Noelle Dilts with Stifel. Please go ahead.

Hi thanks, good morning.

Good morning.

Good morning.

I actually wanted to start off with a few housekeeping questions. First on the pipeline backlog, I know you talked about most of the growth coming from acquired operations, but could you give us the exact number of the amount of acquired backlog in both next twelve months, and total in pipeline?

On the pipeline side, I would say that actually, if I am not mistaken, I think most of the components of the 12-month and beyond are effectively from the acquisition of Nacap, probably in the $150 million range.

Okay. And then when you look at the acquisition-related expenses that hit the quarter, did that fall into the electrical segment, or did it fall into unallocated corporate?

It will fall in unallocated.

Your next question comes from Martin Malloy with Johnson Rice, please go ahead.

Good morning, congratulations on the quarter.

Thank you Martin.

I was wondering, could you talk a little bit more, and John Rogers asked this question, but a little bit more on the margin potential margin increase, as you have more consistent work on the large diameter pipelines? I am just trying to get a feel for is there a couple hundred basis points of upside potential there, as you more fully utilize your equipment?

Yes, in general we look at the pipeline segment being able to get back into a 9% to 12% operating margin to the extent that more mainline work is provided. We reached the 9% level this quarter, we did have the contribution of the mainline work with Nacap, and a little bit of the mainline work here in the US. For us to get into that true 9% to 12% range on a recurring basis, we think that we are going to need to have some level of recurring mainline work, and as we look at 2014 with some of the projections that Jim has talked about, we think that we have that opportunity.

Okay. Thank you.

Thank you.

And there are no further questions at this time. I will now turn the call over to Mr. Jim O'Neil for closing comments.

Well, I would like to thank all of you for participating in our third quarter 2013 conference call, and we appreciate your questions and ongoing interest in Quanta. Thank you. This concludes our call.

Ladies and gentlemen, this does conclude the conference call for today. Thank you for participating. You may now disconnect your lines.