Quanta Services Inc (PWR) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quanta Services first quarter 2014 earnings conference call on the 1st of May. Throughout today's recorded presentation, all participants are in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

I will now hand over the conference to Kip Rupp. Please go ahead, sir.

Great. Thanks, Rodney, and welcome, everyone, to the Quanta Services conference call to review first quarter results. Before I turn the call over to management, I have the normal housekeeping details to run through.

If you would like to have Quanta news releases and other information emailed to you when they occur, please sign up for email information alerts by going to the Investors & 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. The Quanta investor relations app allows users to navigate the Company's investor relations materials, including the latest press releases, SEC filings, presentations, videos, audiocast 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 seven days, 24 hours a day, that can be accessed as set forth in the press release.

Please remember that information reported on this call speaks only as of today, May 1, 2014, 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 or that do not solely relate to historical or current facts.

Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or are beyond Quanta's control and actual results may differ materially from those expressed 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 and disclaims any obligation to update or revise any forward-looking statements based on new information, future events, or otherwise.

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, 2013 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, and welcome to Quanta Services first quarter 2014 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 first quarter results. Following Derrick's comments, we welcome your questions.

Revenues increased approximately 11% in the first quarter as compared to last year's first quarter, which reflects solid demand for our services, safe project execution, and Quanta's leadership position in the energy infrastructure marketplace.

Our operations performed well in what is typically our most seasonally-challenged quarter. Excluding the effects of the unusual charge taken in the first quarter, profitability grew and margins expanded as compared to the same quarter last year. Total backlog increased to a record $9 billion at quarter end, up nearly 29% year over year.

Our employee counts at the end of the first quarter increased 9.4% from year-end 2013 to a record 22,846. Man hours in the first quarter increased 16.1% over the same period last year.

For the second quarter, we anticipate a late breakup or seasonal fall in Canada and in northern parts of the United States. The extreme cold temperatures and the duration of the frigid weather in the first quarter in the northern climes has created, in some areas, up to eight feet. We currently have significant electric transmission and pipeline work underway in these affected areas and anticipate some negative impact to production as the breakup occurs.

As we have stated previously, quarter-over-quarter dynamics, including the timing of project awards and starts as well as weather, can create variances in the short term. However, I want to communicate that we remain comfortable with our full-year 2014 guidance, adjusting for the unusual charge recorded in the first quarter of this year. Derrick will provide more detail about our second quarter and full-year guidance in his commentary.

As it relates to our full-year expectations, we have strong visibility into significant work that could drive backlog to new record levels throughout the year. We anticipate large project awards for both our electric power and oil and gas infrastructure segments in the coming months, some of which we believe will begin construction this year.

We continue to see the size, scope, and complexity of projects increase at unprecedented levels. Quanta anticipated this change in market dynamics and positioned the Company throughout the last several years to capitalize on these trends. We focused on developing our people, project management capabilities, equipment and technology advancements, and also expanded the breadth of our services, all while maintaining a strong balance sheet.

Our customers seek reliable end-to-end solutions and clearly see the value proposition that Quanta delivers, which we believe is unmatched in the industry. As a result, we estimate that our win rate on customer infrastructure programs that involve large, complex, and are multi-year solutions is increasing. In this environment, we believe Quanta is the contractor of choice.

For example, First Energy, which is one of our nation's largest utilities, selected Quanta as its preferred supplier of transmission and substation construction services for its $4.2 billion four-year energizing the future capital program. This program is designed to support system reliability as coal-fired power plants are retired, increase First Energy's load-serving capability in areas where future economic growth is anticipated, particularly in Ohio's shale gas regions, improve reliability of service, create more flexibility to restore service following storms, reduce line losses, and lower overall transmission maintenance costs. This is a large, complex, multi-year program where Quanta can provide a solution to safely complete First Energy's program on time and on budget.

Turning to electric distribution, due to spending reductions during the last recession and the significant allocation of capital to transmission, utility distribution investment has been inadequate. Major weather events over the past few years have highlighted system integrity and reliability challenges.

As a result, we are seeing significant reinvestment in distribution assets across North America. Utilities are implementing system-hardening initiatives to better resist severe storm events and utility regulators are increasingly showing a willingness to allow favorable rate treatment for those distribution upgrades.

In addition, utilities are enhancing distribution networks as distributed generation, demand response, and other technologies are deployed. New home construction strength in some markets is driving distribution activity as well. We continue to add distribution crews to our customers' distribution systems because of these dynamics.

Over the past year, Quanta has experienced a strong double-digit increase in distribution EMSA backlog. We see opportunity for double-digit distribution revenue growth for the next several years as a result.

We continue to believe the market for our oil and gas infrastructure services remains dynamics for at least the next couple years. The unconventional shale plays in the Canadian oil sands are reshaping the North American energy market and could require hundreds of billions of dollars in spending over the next several decades on new infrastructure required to gather and move hydrocarbons to markets throughout North America.

IPF International, a consulting and professional services firm with expertise in energy infrastructure, recently updated their 2011 report regarding expected North American midstream infrastructure investment. From a high level, the updated report predicts greater levels of North American hydrocarbon production than their 2011 report and greater levels of midstream infrastructure investments to meet supply needs.

In looking at the 2014 versus the 2011 report on a comparable basis, North American midstream investment is now expected to total over $311 billion. In average, annual North American midstream investment is anticipated to be $14.1 billion per year from 2014 through 2035, which is a 34% increase versus the 2011 study.

Similar to electric power, we believe Quanta is uniquely positioned to capitalize on these oil and gas infrastructure opportunities. As the leading pipeline construction company with extensive engineering, program management, manpower, and equipment capabilities, we have the scope and scale across North America. Coupled with our reputation, track record, and customer relationships, we are well-positioned to be an important participant during this historic time in the North American oil and gas markets.

Now, let's transition to our fiber optic licensing segment. Our lit service rollout is underway in northeast markets and we're meeting deployment objectives. We recently completed the deployment of our mesh network, which enables us to provide additional lit services and reach more customers in our target markets.

As previously discussed, 2014 is a transition year for this segment as we deploy our lit services offering. Our lit services expansion has been well received by both existing and potential customers. We expect robust growth in lit service revenues over the coming years across the enterprise verticals.

However, our dark fiber services remains this segment's largest revenue contributor. Demand for our dark fiber services remains strong in the K-12 and carrier markets. We will continue to expand our dark fiber network over time, which we believe will fuel demand for our lit services.

In summary, while unusual items impacted first quarter results, end-market drivers remain firmly in place. Demand for our specialty infrastructure services is strong. We have visibility into significant new project awards this year that could drive higher levels of backlog. And our multi-year outlook remains positive.

We are expanding and developing our employee base and broadening our service offerings to meet our customers' growing needs. And we are executing on strategies that differentiate Quanta and position the Company for both the near- and long-term growth.

We continue to believe that we are in unprecedented times, not only in Quanta's history, but in the history of the electric power and oil and gas industries. As a result, we continue to see the opportunity for double-digit growth over at least the next two years.

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

Thanks, Jim, and good morning, everyone.

Today, we announced revenues of $1.76 billion for the first quarter of 2014 compared to $1.59 billion in the prior year's first quarter, reflecting an increase of 11% in quarter-over-quarter revenues. Net income attributable to common stock for the quarter was $54.4 million or $0.25 per diluted share as compared to $72.1 million or $0.34 per diluted share in the first quarter of last year.

Included in net income attributable to common stock for the first quarter of 2014 is an aggregate $38.8 million, or $25.8 million net of tax, of incremental selling, general, and administrative expense associated with an adverse arbitration decision regarding a contract dispute with National Gas Company of Trinidad & Tobago on a directional drilling project that occurred in 2010. The net impact of this decision on our first quarter 2014 results was a $0.12 reduction in diluted earnings per share.

Adjusted diluted earnings per share, which excludes this and certain other items as calculated in today's press release, was $0.44 for the first quarter of 2014 as compared to adjusted diluted earnings per share of $0.38 for the first quarter of 2013.

The increase in consolidated revenues in the first quarter of 2014 was primarily due to an 8% increase in revenues from our electric power infrastructure services segment and a 24% increase in revenues from our oil and gas infrastructure services segment.

Our consolidated gross margin was 15.4% in the first quarter of 2014 as compared to 15% in the first quarter of 2013. This increase in gross margin was primarily a result of improved performance in the oil and gas infrastructure services segment as well as higher revenues earned from both the electric power and oil and gas infrastructure services segments during the current period, which improved these segments' ability to cover fixed operating costs.

Selling, general, and administrative expenses, as presented in this quarter's press release, were $134.5 million in the first quarter of 2014, reflecting an increase of $20.8 million as compared to last year's first quarter. This increase is primarily attributable to $13.6 million in incremental general and administrative costs and $3.9 million in higher acquisition and integrations costs, all associated with companies acquired since the first quarter of 2013.

As a percentage of revenues, selling, general, and administrative expenses increased to 7.6% in the first quarter of 2014 from 7.2% in the first quarter of 2013, primarily due to the impact of the higher acquisition and integrations costs.

Our consolidated operating margin before amortization expense of 5.6% for 1Q 2014 was impacted by 220 basis points due to the arbitration expense, but was otherwise comparable to the 7.9% margin in 1Q 2013. Amortization of intangible assets increased from $5.3 million in 1Q 2013 to $8.2 million in the first quarter of 2014 due to amortization of additional intangible assets associated with acquisitions that have closed since first quarter of last year.

To further discuss our segment results, the electric power segment's revenues were $1.28 billion, reflecting an increase of $97.2 million quarter over quarter or approximately 8%. Revenues were positively impacted by approximately $69 million in revenues generated by acquired companies and from increased capital spending by our customers, partially offset by a lower quarter-over-quarter conversion rate of the Canadian results of operations.

As Jim mentioned, the first quarter was impacted by frigid weather throughout much of North America. This compares to the first quarter of last year, which had mild weather and favorable working conditions that better accommodated production and allowed for certain work to be accelerated out of last year's second quarter into the first.

Despite the weather effects of this year's first quarter, we continued to execute and operating margin in the electric power segment increased to 11.3% in the first quarter of 2014 as compared to 11.2% in last year's first quarter.

12-month and total backlog increased both quarter over quarter and sequentially for the electric power segment. Sequentially, 12-month backlog increased slightly from the end of the fourth quarter of 2013. However, total backlog increased 3.7% to a record $6.19 billion.

Oil and gas infrastructure segment revenues increased quarter over quarter by 24% to $445.9 million in 1Q 2014 as a result of revenue contributions of approximately $118.9 million from companies acquired since the first quarter of 2013. This favorable impact was partially offset by lower revenues related to midstream projects during the first quarter of 2014, as compared to first quarter of 2013, due to project timing as well as the same weather dynamics discussed relative to the electric power segment.

Operating income for the oil and gas infrastructure segment, as a percentage of revenues, decreased to negative 4.7% in 1Q 2014 from 2.9% in 1Q 2013. This decrease is due to the arbitration expense mentioned previously, which impacted the segment by 870 basis points. Partially offsetting this expense were higher margins due to the contribution of greater mainline pipe revenues during the quarter, which typically offer higher margin opportunities.

Also impacting the first quarter was additional expense resulting from an increase in our estimated withdrawal liability associated with the Central States pension plan based on certain withdrawal scenarios that increased our estimated range of probably liability. Although we continue to believe that we effected a complete withdrawal in 2012 and will seek to challenge and further negotiate the amount owed in connection with this matter, based upon available information, we've recorded an adjustment to cost of services during the three months ended March 31, 2014 to increase the recognized withdrawal liability to an amount within the revised range of estimated probability. The negative impact to operating income within the oil and gas infrastructure services segment associated with the increase in the Central States withdrawal liability was offset this quarter by the favorable settlement of certain contract change orders during the period.

Total backlog for the oil and gas infrastructure segment at the end of the first quarter of 2014 is up 2.8% (inaudible) 2013. Contributing to the increase in backlog is approximately $200 million from acquisitions closed during the quarter. Offsetting this increase is the burn on current projects, which were not replaced with new project awards during the quarter. However, as Jim mentioned in his prepared remarks, we see the potential for significant project award announcements later in the year.

Our fiber optic licensing and other segment revenues were down $7.2 million or 16% to $38.5 million in 1Q 2014 as compared to $45.8 million in 1Q 2013, due to lower levels of ancillary telecommunication service revenues as certain larger projects completed in the prior year did not recur to the same extent in 2014.

Operating margin was 31.4% in 1Q 2014 as compared to 36.9% in 1Q 2013 as a result of the telecomm work performed in 2014 having a lower margin profile than last year, as well as slightly higher network maintenance cost during the current period on our dark fiber network and startup costs associated with our new lit service offerings.

Corporate and unallocated costs increased $4.4 million in the first quarter of 2014 as compared to 1Q 2013 primarily as a result of $3.9 million in higher acquisition and integration costs, $2.7 million in higher consulting and other business development fees, and a $2.9 million increase in amortization expense related to 2014 and 2013 acquisitions. These increases were partially offset by lower incentive compensation quarter over quarter associated with current levels of operating activity and profitability.

EBITA for the first quarter of 2014 was $95.1 million or 5.4% of revenues compared $119.3 million or 7.5% of revenues for the first quarter of 2013. Adjusted EBITDA was $185.6 million or 10.5% of revenues for the first quarter of 2014 compared to $159.8 million or 10.1% of revenues for the first quarter of 2013. The calculation of EBITA, EBITDA, and adjusted EBITDA, all non-GAAP measures, and the definitions of these and days sales outstanding, or DSOs, can be found in the Investors & Media section of our website at quantaservices.com.

For the first quarter of 2014, cash flow used in operations was approximately $61 million and net capital expenditures were approximately $69 million, resulting in approximately $130 million of negative free cash flow as compared to negative free cash flow of approximately $12 million for the first quarter of 2013.

This decline in free cash flow was primarily driven by higher working capital requirements during the first quarter as wrap up occurred on specific electric power transmission projects and weather-related delays in parts of North America and the timing of project closeouts affected achievement of certain billing milestones. These increased working capital needs also negatively impacted our DSOs, which were 80 days at March 31, 2014, compared to 72 days at December 31, 2013 and 77 days at March 31, 2013, adjusted for the re-class of the Sunrise change order.

Other items that impacted investing cash flows during the first quarter of 2014 include the closing of five acquisitions for aggregate consideration of $116.5 million including the use of approximately $79.9 million in cash. As it relates to the arbitration expense recorded in the first quarter, we currently anticipate the second quarter cash settlement of this obligation, net of tax benefits, to be approximately $15.4 million.

At March 31, 2014 we had about $213 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 $273 million in cash with approximately $134 million in U.S. funds and $139 million relating to our foreign operation. Considering cash on hand and availability under our credit facility, we had nearly $1.38 billion in total liquidity as of March 31, 2014.

Concerning our outlook for 2014, we expect revenues for the second quarter of 2014 to range between $1.7 billion and $1.9 billion and diluted earnings per share to be $0.35 to $0.37 on a GAAP basis. These estimates compare to revenues of $1.47 billion and GAAP diluted earnings per share of $0.33 in the second 2013.

Our GAAP EPS forecast for the second quarter of 2014 includes an estimate of $8.3 million for non-cash stock-based compensation expense and $8.4 million for amortization expense. Excluding these expenses, our non-GAAP adjusted diluted earnings per share for the second quarter of 2014 is expected to be $0.40 to $0.42 and compares to our non-GAAP adjusted diluted earnings per share of $0.38 in the second quarter of 2013.

As Jim briefly mentioned in his commentary, we currently anticipate the weather aspects of the first quarter to carry over and impact our performance in the second quarter primarily in Canada and the northern regions of the U.S. as we deal with breakup and very wet conditions as these areas thaw. In addition, the timing of projects, including the transition of resources, can impact margins.

We have factored these effects into our overall guidance for the second quarter but have not narrowed our overall diluted earnings per share range for the year as we continue to believe that the latter half of the year offers the opportunity for strong performance.

We continue to expect revenues for the full year 2014 to range between $7.4 billion and $7.8 billion. We expect diluted earnings per share to be between $1.53 and $1.73 on a GAAP basis, giving effect to the $0.12 per share impact of the previously-mentioned arbitration decision on our annual estimates.

Our GAAP EPS forecast for 2014 includes an estimate of $35.5 million for non-cash stock-based compensation expense and $33.3 million of amortization expense. Excluding these expenses, the arbitration expense, and others, comparable to our historical calculations, our expectations for non-GAAP adjusted diluted earnings per share for the year of 2014 remain between $1.85 and $2.05. This compares to $1.71 in 2013. Our forecasted non-GAAP measures are estimated on a basis similar to the calculations of historical adjusted diluted earnings per share presented in our release.

We are currently forecasting net income attributable to non-controlling interests to be approximately $3 million to $4 million in the second quarter of 2014 and $13 million to $14 million for the year. For additional guidance, we are currently projecting our GAAP tax rate to be 34.5% to 35.5% for 2014 and our diluted share count to be about 219.8 million shares.

We expect CapEx for all of 2014 to be approximately $300 million to $325 million, which includes CapEx for our fiber licensing and other segment of about $50 million to $60 million. This compares to CapEx for all of 2013 of $264 million. Overall, our capital priorities remain the same with a focus on ensuring adequate resources for working capital and capital expenditure growth and an opportunistic approach towards acquisitions, investments, and the repurchases of stock.

This concludes our formal presentation and we'll now open the line for Q&A. Operator?

Thank you. (Operator Instructions). Noelle Dilts, Stifel.

I first wanted just to go back to these potential large contract awards that you talked about potentially coming through in the next few months. First, in terms of mix, are you seeing more of that on the pipeline side or the transmission side and can you talk about if you're seeing more of the opportunities in Canada or the U.S.?

And then, in conjunction with that, last quarter you talked about needing to pick up some additional work to hit your pipeline targets. Does what you're looking at here get you comfortably there?

Noelle, this is Jim. I think it's a good mix of both, both segments. It's probably 60-40, 50-50. It depends upon how it plays out but we expect large opportunities in both our electric power and oil and gas segments and also believe, geographically, it will come from 60-40, 50-50 U.S. and Canada. So, it's a good diversity of geographic and across both of our segments.

Great. And then, just given the strong pipeline outlook that you relayed in your comments, can you talk about if you're starting to see some improvement in terms, conditions, pricing? Are you seeing a shift toward more negotiated work?

Yes, there's a mix but, certainly, we are having more advanced discussions with customers that take us away from our traditional bid and buy mentality and moving more toward negotiated type multi-year programs that we talked about in my remarks, more complex, larger multi-year programs where there's more shared risk. So, yes, the contract terms would be improving in those situations.

Tahira Afzal, Keybanc Capital Markets.

Thanks, a lot. First question is just to follow up on the earlier question on the large awards. You mention in your press release you do expect some notable additions to backlog over the next couple of months and that's a fairly strong statement given you folks are pretty conservative. Any color you can provide on what gives you the confidence on the visibility there would be helpful.

Well, Tahira, we're in various stages of negotiation, which gives us the comfort that we can make those types of comments in our press release and in the script. So, they're advance discussions, many of them in the contract stage, and we're just having discussions with these customers exclusively. So that brings us the confidence that these programs will turn into backlog sometime in the near future.

Got it, okay. And second question is in regards to the second quarter guidance. As you look back to when you set guidance, did you kind of expect the weather issue and the sequential decline from first to second quarter to be of the extent, potentially, that we are seeing?

And then, if you could give us any color, if possible, on the acquisitions, how much they have potentially contributed to backlog for the quarter, and in terms of whether you think they're notable accretive for the full year. Thank you.

Tahira, this is Derrick. Relative to the second quarter, I think if you recall from our previous conference call in the year-end discussion, we had talked about the fact that we had to see how the weather effects would come out and looked at how those things would impact our overall production for the first half of the year when considering what we would be looking at for our margin profile overall as well as our view towards the second half of the year. So, yes, there was definitely a degree of that factored into our original guidance as to what would happen here in the second quarter.

The breakup went a little bit longer so there is a degree of probably a little bit lower view into that second quarter than maybe we had at year end. But we still think that, as we look at the rest of the year, we'll be able to make that up in the strong performance for the third and the fourth.

As it relates to the acquisitions, the acquisitions were slightly accretive to the first quarter. However, they were baked into our original first quarter guidance so there's really no difference. They were contemplated in our forecast and, overall to the year, all acquisitions we look for to be some level of accretive and we do believe that those acquisitions are contributing to the year at some degree.

Dan Mannes, Avondale.

So, not belabor the point, but I just wanted to make sure we're really clear here. Given the guidance for the year, given a solid first quarter and maybe a slightly softer than expected second quarter, when you look at the big environment and the number of things you're talking about in terms of potential large wins; how much is that needed in order to meet guidance versus how much would give you potential upside as you look at the back of the year, especially in the context of a pretty strong track record the last couple years of coming in ahead of initial guidance?

Dan, this is Derrick. Relative to the high end of our range, I mean there's a degree of uncommitted that is in the high end of our range, kind of specifically on mainline pipe, but there's always uncommitted across the whole spectrum. So, there is additional awards we'd look at that will be needed for us to get to the high end of the range.

As to speak to; how much is that and/or how much more could happen and whether that would allow us to exceed? Now there are a lot of dynamics associated with those awards. We need to look at getting them and then getting them placed and seeing at what point in time we can get to an execution stage in 2014 before we could really comment as to whether it cause us to increase our guidance or not.

Got it. And then just so I can clarify, as it relates to M&A, it sounded like most of the M&A impact in the first quarter was on the oil and gas side. I guess I was trying to understand. I thought a number of the acquisitions in the first quarter were going to be more electric. Was that already baked into guidance or does that help fill in some of that uncommitted as well?

Yes, all of our acquisitions in the first quarter were baked into our year-end guidance from our conference call. The difference as it relates to the impact is, is that a big portion of the electric power acquisitions were subcontract work and so, therefore, there's a much less impact on the backlog component. So, that's why you see a larger impact on backlog on the pipeline side.

Jamie Cook, Credit Suisse.

Hi, good morning. Just a couple questions. Just to clarify on the weather, I know it was an issue in the first quarter. It will roll into the second quarter. Can you give us some degree on the EPS impact or the operating income impact? Just so I can get a sense for how much you have to make up for the weather issues.

And then I guess my second question is, margins on the oil and gas side, the first quarter was a little weaker than I would have thought but it sounds like, given the order activity, that these should improve throughout the year; so, how you're thinking about that.

And then my last question; should we assume better terms or pricing on these contracts that you're bidding, in particular because you're saying you're bidding on these exclusively? Thanks.

Jamie, this is Derrick. Relative to the first quarter, kind of from a weather perspective, what I'd say is we came in at the top end of our revenue range but we kind of came in at the midpoint of our EPS range. So, I think that kind of gives you a little bit of color.

Okay.

The reality is, the first quarter itself, we were able to actually keep some degree of execution because the fact that it was cold and stayed frozen. And so we were able to get a degree of execution in the quarter.

Your second question was --

My second question was just on the oil and gas side. The margins in the first quarter were a little weaker than I would have thought but you would think you should get some improvement, particularly with the order trends that you're talking about. How should we think about that?

Sure, yes.

And then the last was the terms and conditions on the projects that you're bidding exclusively. I would assume that they would be accretive to margins or mix. Thanks.

Sure, on the margins itself, seasonality within the pipeline group is going to remain and so we would always expect the first quarter seasonality impacts to be such that margins within that segment will still be -- we would anticipate the lowest margins for the period.

We improved our margins this quarter versus last quarter. If you adjust for the charge, I think you'll see something in the order of magnitude of kind of a 4% margin within the segment, which is greater than the 2.8% we made last year. So, we did see improvement. We expected to see some degree of improvement.

As we look to the rest of the year, I think we can continue to see improvement similar that you saw last year with each of the following quarters having a degree of upward movement. And I would anticipate for that type of seasonality you'll see on a go-forward basis.

And, Jamie, on your third question, I would say, yes, overall you will see better contract terms than we have historically had on these larger, more complex multi-year programs that are going to come out here in the coming months.

Will Gabrielski, Stephens.

Yes, thanks. Good morning, Jim and Derrick.

Good morning.

So, I guess -- I mean I know there was a lot of noise in Q1 -- but the electric margin was up a little bit year over year and, for a Q1 that definitely had a lot of weather across the lower 48 and Canada, seems pretty solid. I was just wondering; was there anything unique to the quarter or do you think we still grow off of Q1 just as weather improves? Or is there something new that's impacting Q1 that made that number better than we've seen past years in Q1s?

There was nothing that was particularly unusual to the electric power margins in Q 1 from the standpoint of an unusual item. They came in at 11.3%, which I commented a second ago to a certain extent the long winter and the prolonged freeze helped production in a lot of the northern climates. So, what's happened is some of that's otherwise pushed the second quarter. As the breakup and thaw occurs, it will impact us in the productivity more in the second.

I would say that electric segment, to answer your other question, we continue to see man hours increase in that segment. There's an opportunity, certainly, with my comments about backlog growth, I certainly think that there are clear opportunities for us to grow our revenues in the segment from this point.

Okay. And then, to follow up, Jim, on the First Energy comment you made around an alliance relationship or a preferred supplier relationship with First Energy, particularly in Ohio. I guess, is there more of those conversations taking place? Because I remember, I guess, 2007, 2008, and 2009 it seemed like you announced a few of those big alliance type relationships. Are you seeing that more of a norm now? Is this very one-off or is there any color you can add round that type of a relationship structure going forward?

Well, certainly, we've always had those discussions in the past with customers, but the opportunities are more today than they have been in the past because these programs are becoming so large and complex and the scope and scale and expertise and your track record is extremely important. So, we are seeing more opportunities for First Energy type relationships than what we've seen in the past, going forward.

Alex Rygiel, FBR Capital Markets.

Thank you. Good morning and nice quarter, Jim. Quick question, you mentioned that distribution double-digit backlog growth, double-digit revenue outlook for the next couple years. Can you comment on where the electric distribution margins are relative to reported electric power today and sort of what that incremental margin might look like over the next couple years as the revenues grow nicely?

Alex, I think that, as we leverage our fixed costs in that business and as the labor workforce continues to tighten and as we continue to take over more of the service offerings, not just provide maintenance services, but more asset management and distribution, which there's clear opportunities to do that for many of our distribution customers, that your margin profile will approach that of what we make in transmission over time.

So, one of the big misnomers is that, when we do more distribution, that our margins will erode because it's not as profitable as transmission. That's just not the case. We think that margins will improve as distribution continues to unfold over the next several years.

And secondly, can you quantify your activity level on mainland mainline pipe in sort of the first half of 2014 versus the second half of 2014? And I don't know exactly how you want to quantify it, but maybe talk about quantity of spreads deployed, maybe in the first half of the year versus the second half of the year.

Well, we've been saying for quite some time that we believe that activity in mainline is going to accelerate in the second half of this year and certainly into 2015. And we believe that one of the big opportunities for us to increase revenues will be in that segment and in mainline in the second half of the year.

So, as far as trying to equate how many spreads we're going have out or how many jobs or what that looks like from a revenue standpoint, I would just say it's a significant increase in the second half of the year than what we've executed on in the first half of the year, which is typically seasonal for that type of business. I mean the business typically starts ramping in second quarter of any given year. And third quarter is where you really get a lot of good production because that's when you have your better weather during any calendar year.

Steven Fisher, UBS.

Thank you. Good morning. I just want to make sure the late breakup issue is not going to be a bigger problem than kind of what you're thinking at the moment. So, can you maybe just give a little more color on how many projects are affected, what stages you are on those projects, and really how, I guess, you've approached the budgeting for that and how comfortable you are that you've got the cost budgeted accurately?

Well, Steve, in the past we've said we've taken a prudent approach on guidance and we try to bake in any impacts to the breakup so that we don't have any surprises. I mean we have a significant amount of activity going on in Canada. We're probably on four or five major projects in various phases. Also, we're very active in the Northeast U.S. and projects are in various phases. Some will be competed throughout the year. Some are multi-year projects. But I would just say that the message from us is that we've tried to bake in any effects of breakup production issues in the guides that we provided to you.

Okay. And it sounds like you're looking for a pickup in the second half to offset the breakup issues to get to the guidance. So, I guess, what are the most important things that still have to happen in the second half? Is it more execution or is it more new bookings? And, if it's new bookings, are you counting on some of the bigger projects or is it the pace of regional work?

Steve, this is Derrick. The reality is I think that we typically expect the second half of the year to be a more productive period for us. From a seasonality perspective, the third quarter tends to be the largest revenue period. We still expect that as of today. Typically, the fourth quarter falls off a little, which we still anticipate today. But, I think the combination of those things, from a total volume perspective, will well exceed what we see here in the first and second quarter. And, as part of that, as typical, that leads to our ability to have higher margins, both because of the volume as well as the fact that those weather dynamics allow us to typically have an expanded margin profile.

So, I think we'll still be very much within the margin profile that we've talked about. In the last quarter we talked about electric power being able to be in that 10% to 12% margin range. And we still believe that. As well as on the pipeline side, that on the upper end of the range we'll be able to see margins to get within that 9%. So, that, I think, is still very similar to our guidance that we provided previously. So, we're comfortable that that profile can still exist in the second half of the year.

Vishal Shah, Deutsche Bank.

Yes. Thanks for taking my question. Derrick, can you talk about the free cash flow outlook for the year. I know you had a net positive free cash flow for first quarter but, as you sort of think about some of these big projects, how should we think about free cash flow?

And also, where do you think any potential option lies on the M&A front? Is it oil and gas? Is it Canada? Can you talk about some of the outlook there? Thank you.

Sure. We typically stay away from providing free cash flow guidance. I can tell you that I think it's got the opportunity to be comparable to 2013 but it's highly dependent upon the fourth quarter. The fourth quarter of last year, we had a very strong free cash flow because of the timing of roll-offs, starts and stops of projects, etc. But the weather dynamics, any of the individual acquisitions, project starts and stops, a lot of the work opportunities that Jim has spoken about for new awards and the timing of those can impact. So, I caveat it heavily but I think you could see it's possible for it to be comparable to 2013.

From an acquisition perspective, we still consider ourselves to be highly acquisitive. We've done a number of acquisitions throughout the end of 2013 and even in the first part of this year, thus far. I think that, overall 2014, we could see acquisition dynamics fall somewhat comparable to 2013, both from a contribution of revenue and total number of acquisitions and spend as far as cash and stock split is probably somewhat comparable.

As to where they'll fall, we continue to be opportunistic, whether they're electric power side or the pipeline side. I think that you'll see that they're probably going to be within those two segments for certain. But, we're going to approach it opportunistically and I don't know that I could say where you'll see a greater number of acquisitions between the two.

Thank you.

Adam Thalhimer, BB&T Capital Markets.

Hey, good morning, guys. Nice quarter.

Good morning.

First question, I wanted to ask about U.S. transmission bidding. It's been a while since we've seen large awards from the public contractors. I'm just curious what the bidding activity is like for larger transmission jobs in the U.S.

Well, we had several awards, I believe, in the second half of last year. So, we've had a quarter here where we have had not much activity but that's not unusual. We do think that there are, from a dollar standpoint, is many opportunities out there in the -- they could be announced in the next year that we've ever seen before in history. So, it's still a very active transmission market in both the U.S. and in Canada. And certainly we see opportunities for growth in the electric segment, which is being driven by primarily transmission.

Great. And then, I wanted to ask you about the programs like with First Energy. You said it was $4.2 billion over four years. What percentage of that could turn into revenue for Quanta? I mean, is it in the, maybe, 50% range?

Yes, rule of thumb -- I mean you've got engineering and materials in that number. It's probably less than that. It's probably in the 35% to 40% range. But it could be as much as 50% depending upon the customer and how much the material and engineering dynamic is.

Craig Irwin, Wedbush Securities.

Thank you. Good morning, gentlemen. Jim, I was hoping you could update us on the number of large electric transmission projects you're executing right now and how these are likely to transition this year, the number completing and the number starting up by the end of the year.

Individual transmission projects that average over $100 million in size, we have been consistently running between 16 to 18 projects. We were on the same number of projects in the second quarter of last year as we'll be on in the second quarter of this year. And we don't anticipate that number moving in the near term. We think it will hold at that level.

Thank you. My second question was about some of the combined cycle opportunities. Obviously it's a new market for you and a pretty attractive long-term market. Can you maybe discuss with us how things are progressing there for Quanta? And maybe the potential project pipeline that you're looking at as far as whether or not you think that there could be incremental bookings in 2014 or if this is something where we have to wait for a more significant momentum?

You know, Craig, I look at this almost like our utility scale solar. We're opportunistic there and we take advantage of the opportunities when they come. I can't go out and say that we're going to be at 20% growth or double-digit growth for the year-over-year for the next two years in that business because the opportunities are spotty. But, when they come, like the one in Alaska that we announced earlier this year, we're certainly excited about the opportunity to build those programs. But I can't tell you whether that business is going to have a steady growth profile to it or not.

John Rogers, D.A. Davidson.

Hi, good morning.

Hi, John.

Hey. First thing, Jim, in terms of large project opportunities you've been referring to, how much of that work that you could book here is 2015, 2016 potentially? I mean how much visibility are we potentially getting here?

On most of the electric projects, many of them would start in 2014 and some of them are multi-year bid, multi-year programs. I would say that probably half of the ones we're looking at are multi-year programs and half will probably take the year to complete.

And, on the pipeline?

The pipeline is probably the same, maybe more multi-year component to them than one-off projects. But, there are some projects that are three or four months that we're looking at potentially being awarded. And there's also some multi-year programs that we're looking at as well.

Okay. And just as a follow up, can you give us a quick update on what you're seeing in the offshore market in terms of acquisition opportunities there?

Yes. I wouldn't say so much acquisition opportunities per se. I would say that the market itself is extremely active and continues to provide opportunities. And it is going to grow at or more than what the segment is projected to grow at. So, we're pretty excited about that. We're being prudent in our approach there because it is relatively -- it's an adjacent market. I would say that more of our acquisition opportunities are in our core business. But, there are certainly opportunities offshore and we're going to take advantage of those as well.

Andy Wittmann, Baird.

Hi, guys. I wanted to just dig a little bit more into the pipeline business and kind of the market dynamic there. It's coming into your income statement a bit. Where is it for the industry? Where's the industry being utilized for large-diameter pipeline, say, Jim? Do you have a sense of that? And what's the implication for that for your pricing? Are you getting similar more favorable terms in the pipelines like you are in the electric business that you referred to earlier?

Yes. I think, like I mentioned earlier, on future work that we're looking at, the ramp at the end of 2014 and into 2015, we're in the very early stages of this ramp up. So, I think what's been done historically is different than what we're going to see going forward. And, the projects going forward, I think overall you're going to see better contract terms on those programs.

Does that mean not fixed priced? Or does that just mean guaranteed maximum? What does that mean?

It's a mix. It's a mix. I mean you could get better contract terms to where you're sharing downside risk. It could be some cost-plus programs. Some are fixed price with floors on risk sharing. So, it's just a mix of things. Overall, though, there's more risk sharing between the customer and the contractor especially on the multi-year programs.

And just maybe a couple of quick technical questions, can you give us the acquired T&D backlog, if any, as well as the storm contribution, Derrick?

Yes. The backlog for T&D from acquisitions for the first quarter was relatively minor. It was about $25 million. And then storm, we did a little over $30 million this quarter, which is comparable to the first quarter of last year.

Brian Lee, Goldman Sachs.

Hey, guys. Thanks for taking the questions. I guess as a follow up to that last one, thanks for breaking out the quantification on the backlog impact, Derrick. On the acquisitions, though, how should we think going forward about the organic growth opportunities you guys are looking at to continue to add to what's been robust backlog growth versus acquiring backlog adds? I guess I'm wondering; is it unfair to assume most of the backlog additions in recent quarters have come from acquisitions and if that will continue to be the trend?

No. I think that most of Jim's commentary has been about the opportunity for organic backlog growth for the remainder of the year. That's where we think the vast majority of our backlog growth will potentially come from over the next three to six, nine months. And then relative, from an acquisition perspective, the backlog contribution varies. As an example, like I said, the first quarter we had minimal backlog contributions because some of that stuff was subcontract-related versus the contribution directly from the acquisitions.

Okay, thanks. And maybe related to that, and I apologize if you covered this. I jumped on a bit late. I might be misinterpreting this but, if I heard you correctly, I thought you had suggested that there might be a shift here toward more distribution-related power project activity versus transmission going forward. I guess, if that's the case, can you help us understand the competitive environment and maybe the margin delta you expect between the distribution versus transmission and how that would impact your ability to maintain current segment margins and/or expand them if that is going to be the trend?

Well, we believe that distribution will grow at the same pace that transmission is growing. I mean, obviously, distribution is a smaller part of the segment but they should both grow at the same percentages over the next couple years.

The competitive environment, we're on many customer systems. We've been on many customer systems for years. Most of that increase is our existing customer base increasing the number of crews that they have working, our crews that are working, because they just have more work to do. And we have won a couple of new distribution contracts from new customers, which is part of that growth as well. But, I see distribution and transmission growing at the same rate, which is double-digit growth opportunities.

John Braatz, Kansas City Capital.

Good morning, gentlemen. Jim, this question, you talk about the increase in complexity and sophistication of the transmission work that's coming ahead. And I guess my question is, at the same time you mentioned that you're earning a greater margin on that business. Is that margin reflective of you're one of the few companies that can do this work? Or are you assuming a little bit higher risk profile on these projects and that accounts for a little bit higher margin?

I think mostly we're involved more with the customer from planning these programs from a constructability standpoint. We have the resources and the scope and scale to accomplish these large-scope projects in the timeline that they need to accomplish them. We're providing a broader solution to these customers to give them more predictability that their projects will get finished on time and on schedule, where others have had issues doing that. So, when you provide more solutions to a customer than a discrete service, the opportunity for that customer to see that value creates the opportunity for us to make slightly better margins on those programs.

Okay. So, not really a higher risk profile, then?

Well, when you take over more, you're going to take over more risk, when you take over more of those services providing solutions. These projects are more complex so the contractor does have more risk but we do believe that that risk is mitigated. We have an excellent track record, since our inception, of performing electric transmission programs and don't anticipate any issues. The more risky a project is, whether it's in a more environmentally-sensitive area or a more difficult geographical terrain, the further that differentiates us from your competitor because you are taking more risk. But, we like that. We do that very well. And we believe we mitigate those risks very well also.

Okay. Jim, thank you very much.

Thank you.

There are no further questions. Are there any further points you wish to raise?

Well, I would just like to thank all of you for participating in our first quarter 2014 conference call. We appreciate your questions and your ongoing interest in Quanta Services. Thank you and this concludes our call.