Quanta Services Inc (PWR) 2014 Q3 法說會逐字稿

Good day, and welcome to the Quanta Services third quarter 2014 earnings conference call. Please note today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Kip Rupp. Please go ahead, sir.

Great. Thank you, Joshua, and welcome, everyone, to the Quanta Services conference call to review third quarter results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you'd like to have Quanta's 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 the Quanta Services website at QuantaServices.com.

You can also access Quanta's latest earnings releases and other investor materials such as press releases, SEC filings, presentation, videos, audiocast conference calls, and stock price information with the Quanta Services Investor Relations app, which is available for iPhone, iPad, and Android mobile devices for free at Apple's App Store and at Google Play. 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, November 5, 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 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 in any 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; its quarterly reports on Form 10-Q for the first and second quarters of 2014; 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'd 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' third 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 third quarter results. Following Derrick's comments, we welcome your questions.

Quanta continues to execute in all operating segments at high levels. Compared to the third quarter of last year, revenue increased 32% to a record $2.17 billion, non-GAAP adjusted earnings per share increased 33% to $0.61, and backlog increased 19% to a record $9.63 billion. These solid results reflect Quanta's leadership position and ability to capitalize on opportunities for growth in the dynamic energy infrastructure market.

Electric power segment revenues grew more than 31% during the quarter as compared to the same quarter last year. In addition, excluding the effect of a charge associated with the previously completed Sunrise Powerlink transmission project, our electric power segment operating income margins returned to normal levels in the third quarter after experiencing margin pressure during the second quarter, due to the challenging effects of extreme winter weather and late breakup in Canada and the northern parts of the United States.

During the quarter, Nalcor Energy selected Valard Construction, a Quanta Company, to install transmission infrastructure for the Labrador-Island Transmission Link project. This is the largest transmission project that Quanta has ever been awarded and one of the largest high voltage transmission projects to be built in Canada. It is also the second major transmission project awarded to Quanta by Nalcor Energy over the past 12 months, the first being the Muskrat Falls project in December of last year.

For the Labrador-Island Transmission Link project, Quanta will install approximately 684 miles of 350-kilovolt overhead high voltage direct current transmission line running from the Muskrat Falls Hydroelectric Generating Facility in Central Labrador to Newfoundland's Avalon Peninsula. Our scope of work includes all construction aspects of the project, including geomatic services, management of right-of-way clearing, access and reclamation, installation of concrete foundations, tower assembly and erection, and conductor stringing. We have mobilized resources for this project and expect the project to be completed during the summer of 2017.

Also during the third quarter, Quanta was selected by Southern California Edison for the 500-kilovolt underground project for the Chino Hills segment of the Tehachapi Renewable Transmission Project. Construction on this project has begun, and we expect to complete the project during the first half of 2016. Though these two projects are very different from one another, both are extremely challenging, and Quanta was selected because we have the skilled resources and track record for safely completing complex projects in the electric transmission marketplace.

Our utility customers have made significant investments in their electric power infrastructure throughout North America over the past several years, especially in transmission, and we expect continued strong levels of investment by utilities and transmission, and distribution infrastructure, in the foreseeable future. The dynamics spurring North American transmission and distribution investments that we have discussed on our earnings calls for the past several years continue to drive our customers to invest in their electric power infrastructure going forward.

The most significant drivers include: an aging power grid, the majority of which is approaching or beyond the end of its useful life, that is [well] -- not configured to serve the population centers of today; the changing mix of power generation, including the increase in renewable generation development; and the switch from coal to natural gas-fired generation. As a result of these dynamics, new transmission and related infrastructure is required to interconnect these new generation sources to the grid. Existing infrastructure needs to be upgraded, replaced, and modified to accommodate the shifting generation mix.

Finally, new regulation, and the implementation of existing regulation, are significant drivers of infrastructure investment, such as the Energy Policy Act of 2005, NERC reliability requirements, mercury air toxic standards, the recently passed Critical Infrastructure Protection Standard, and the implementation of FERC Order 1000.

Demand for our oil and gas infrastructure services remains strong, driven by the development of unconventional shale plays in North America, the Canadian oil sands, and the coal seam gas in Australia. Our oil and gas infrastructure segment revenues grew significantly, and our operating income margins expanded as compared to the third quarter of last year, due to favorable end market demand and increased contribution from mainline pipeline projects in North America and Australia.

Despite the recent decline in oil prices, our customers continued to move forward with the development of unconventional shale and Canadian oil sands infrastructure, as well as mainline pipeline programs. We have seen no indication that related customer capital programs will be curtailed. While further and sustained declines of commodity pricing could impact our customers' investment plans for a period of time, there are several things to consider as it relates to Quanta's oil and gas infrastructure business.

The unconventional shales in North America and the Canadian oil sands are game-changing dynamics in the energy industry. We believe our customers are strategically planning and investing in the long term infrastructure they need to transport these new resources of hydrocarbons over the next several decades, not just years.

The complexity, cost, and challenges to design and gain regulatory approvals, permits, and right-of-way for large infrastructure projects such as mainline projects requires longer term planning and commitment. We believe the industry outlook for our oil and gas infrastructure and, in particular, for mainline pipeline programs, remains positive for the foreseeable future.

In fact, subsequent to quarter end, we entered into or expanded multiple long-term agreements with customers to build mainline infrastructure over the next several years. Due to confidentiality agreements with our customers, we are not able to provide any more specific details about these arrangements at this time; however, we expect a meaningful increase in mainline pipe construction activity throughout 2015 and beyond. We also continue to believe that industry capacity to build large diameter mainline pipeline will be pushed to the limits to serve customer demand in both 2015 and 2016, and perhaps beyond.

As it relates to our gathering activities, the majority of our gathering work is performed in the Marcellus and Utica shales, which are primarily driven by the production of natural gas and natural gas liquids. As a result, our gathering operations are not significantly exposed to the price of oil.

In the Marcellus and Utica, natural gas trades at a discount rate due to the lack of infrastructure available to take product from these areas to end markets. Therefore, we see continued solid demand for our services into the foreseeable future.

Finally, our fiber optic licensing operations continue to perform well. Demand for our dark fiber network remains solid, and our lit services rollout continues to progress in our Northeast markets. We are engaging current and potential new customers with a broad platform of private network communication solutions that we offer, and we see attractive growth opportunities over the next several years as our lit services offerings gain traction in 2015 and beyond.

In summary, our operations performed well in the third quarter and for the first nine months of 2014. End market drivers remained firmly in place, and demand for our specialty infrastructure services is strong. Based on these factors, and the visibility we have into new project awards going forward, we expect strong backlog levels for the foreseeable future.

From a qualitative perspective, we continue to believe that our end markets provide the opportunity for double-digit growth through at least 2015. In addition, based on what we see and understand today, we believe 2016 is likely to be a year with continued growth opportunity. We expect to provide our formal 2015 financial guidance on our fourth quarter earnings call in February of next year.

Our qualitative outlook for our business is largely shaped by our collaborative relationships with our customers, which gives us a valuable insight into their multi-year infrastructure capital programs. As I hope you've taken away from my comments this morning, we continue to have momentum as we move through the remainder of 2014, and are excited about the potential we see for 2015 and beyond. I will now like to 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 $2.17 billion for the third quarter of 2014 compared to $1.65 billion in the prior-year's third quarter, reflecting an increase of 32% in quarter-over-quarter revenues. Net income attributable to common stock for the quarter was $94.6 million or $0.43 per diluted share, as compared to $92.9 million or $0.43 per diluted share in the third quarter of last year.

Included in net income attributable to common stock for the third quarter of 2014 was the $52.5 million charge, or $32.3 million net of tax, to a provision for a long-term contract receivable. This receivable is related to a previously disclosed change order of $165 million on the Sunrise Powerlink project and electric power infrastructure services project that began in 2010, and was completed in 2012. The receivable is currently the subject of an ongoing arbitration proceeding.

As part of our ongoing assessment of this asset's recoverability under GAAP, a provision of $52.5 million was recognized in the three months ended September 30, 2014, as a charge to selling, general, and administrative expense, to reflect changes in our assessment of the collectability of amounts owed to us by the customer. As discussed in prior quarters, operational and contractual decisions made by us during the performance of this work are based upon verbal assurances from the customer, and we relied on those representations.

These assurances, coupled with our previous legal strategy, supported the view that the full amount of the change order would be collectible; however, during the third quarter of 2014, we continued to evaluate the legal theories and strategies that would be most advantageous to pursue in arbitration. This resulted in a change in our expected arbitration strategy, which also caused us to reassess our settlement strategy and our views on estimated settlement outcomes.

As a result, we recorded an adjustment to the net realizable value of the Sunrise receivable in the current period in accordance with GAAP. This revised value is based on a range of possible outcomes, but we continue to pursue all alternatives to resolve this matter, including settlement discussions and arbitration, if necessary, and we still intend to pursue collection of amounts in excess of this revised value.

However, the matter's currently in arbitration, and is therefore subject to risks and uncertainties. The net impact of this provision on Quanta's results for the third quarter of 2014 was a reduction of $0.15 per diluted share.

Additionally, included in our results for the third quarters of 2014 and 2013 were the releases of income tax contingencies of approximately $4.9 million and $6.6 million of income, or a net benefit of $0.02 per diluted share for the third quarter of 2014, and a net benefit of $0.03 per diluted share for the third quarter of 2013, both due to the expiration of various state and federal statute of limitation periods. Adjusted diluted earnings per share, as presented in today's press release, was $0.61 for the third quarter of 2014, as compared to adjusted diluted earnings per share of $0.46 for third quarter of 2013.

The increase in consolidated revenues in the third quarter of 2014 as compared to the same quarter last year was primarily due to a 31.6% increase in revenues from our electric power infrastructure services segment, and a 35.7% increase in revenues from our oil and gas infrastructure services segment. Incremental revenues contributed during the quarter from acquired companies are estimated around $195 million, which indicates that organic growth in consolidated revenues was in the double-digit range of approximately 20%. Our consolidated gross margin was 16.3% in the third quarter of 2014, which is comparable to 16.6% in the third quarter of 2013.

Selling, general, and administrative expenses as presented in this quarter's press release were $148 million in the third quarter of 2014, reflecting an increase of $23 million as compared to last year's third quarter. This increase is primarily due to $15.4 million in incremental G&A costs associated with acquired companies, and approximately $4 million in higher salaries and benefits costs, and related ancillary administration costs associated with the current levels of operation, partially offset by lower levels of incentive compensation.

Selling, general, and administrative expenses as a percentage of revenues were 6.8% in the third quarter of 2014 as compared to 7.6% in the third quarter of 2013, which reflects better cost absorption from higher overall levels of revenues. Our consolidated operating margin before amortization expense was 7% for Q3 2014, which is impacted by approximately 240 basis points, due to the charge to provision, and compares to a 9% consolidated operating margin in Q3 2013.

Amortization of intangible assets increased to $9.5 million in the third quarter of 2014 from $7 million in Q3 2013, primarily due to amortization of intangible assets associated with acquisitions that have closed since the third quarter of last year. To further discuss our segment results, electric power revenues were $1.38 billion reflecting an increase of $330.8 million quarter-over-quarter, or approximately 31.6%. Revenues during the quarter were positively impacted by increased activity from electric power transmission, distribution, and power generation projects, which resulted primarily from increased capital spending by our customers, as well as an estimated $65 million in revenues generated by acquired companies.

Operating margin in the electric power segment decreased to 7.5% in the third quarter of 2014, as compared to 11.7% in last year's third quarter, primarily due to the effects of the charge to provision for a long-term contract receivable. Also contributing to the decrease were slightly lower margins earned quarter-over-quarter associated with typical project variability, as well as lower margins earned on certain power generation projects ongoing during the third quarter of 2014, as compared to those ongoing during the third quarter of 2013.

Sequentially, as of September 30, 2014, both 12-month and total backlog for the electric power segment increased by 6.5% and 10.6%, primarily due to certain larger contract awards and to a lesser extent from acquired companies. Quarter-over-quarter, 12-month and total backlog increased 19% and 21.9% as compared to the third quarter of 2013.

Oil and gas segment revenues increased quarter-over-quarter by $197.4 million, or 35.7%, to $749.8 million in Q3 2014, largely as a result of revenue contributions of an estimated $130 million from acquired companies, but additionally from strong organic growth associated with increased capital spending by our customers. Operating income for the oil and gas segment as a percentage of revenue increased to 10% in Q3 2014 from 9% in Q3 2013. This increase is primarily due to the contribution from mainline pipeline projects in the US and Australia, which typically offer higher margin opportunities, as well as better fixed cost absorption due to higher revenues.

Quarter-over-quarter, 12-month and total backlog for the oil and gas infrastructure services segment increased by 25% and 14.9% when compared to the third quarter of 2013, as a result of acquisitions and, to a lesser extent, new project awards. Sequentially, backlog grew for both 12-month and total backlog by 23.8% and 14.9%.

Our fiber optic licensing and other segment revenues were down $2.2 million, or 5%, to $42.1 million in Q3 2014, as compared to $44.4 billion (Sic - see press release �$44.4 m�) in Q3 2013, due to lower levels of ancillary telecommunication services revenues. Operating margin increased to 32.8% in Q3 2014 as compared to 31.8% in Q3 2013, primarily due to a change in revenue mix, with relatively fewer revenues derived from ancillary telecommunication services, which typically carry lower margins. Corporate and unallocated costs increased to $3.4 million in the third quarter of 2014 as compared to Q3 2013, primarily as a result of a $2.5 million increase in amortization expense, due to the amortization of newly acquired intangible assets from recent acquisitions.

EBITA for the third quarter of 2014 was $146.7 million or 6.8% of revenues, compared to $141.8 million or 8.6% of revenues for the third quarter of 2013. Adjusted EBITDA was $249.5 million or 11.5% of revenues for the third quarter of 2014, compared to $185.8 million or 11.3% of revenues for the third quarter of 2013. The calculation of EBITA, EBITDA, and adjusted EBITDA are all non-GAAP measures, and the definitions of these and day sales outstanding, or DSO, can be found in the Investors and Media section of our website at QuantaServices.com.

For the third quarter of 2014, cash flow provided by operations was approximately $64 million, and net capital expenditures were approximately $77 million, resulting in approximately $13 million of negative free cash flow, as compared to free cash flow of approximately $37 million for the third quarter of 2013. The decrease in free cash flow was primarily driven by increased working capital requirements associated with the current period's increased levels of operating activity. DSOs were 83 days at September 30, 2014, compared to 72 days at December 31, 2013, and 82 days at September 30, 2013.

Impacting our investing cash flows during the third quarter of 2014 was the closing of two acquisitions, which included cash consideration of approximately $81.8 million net of cash acquired. At September 30, 2014, we had about $320 million of letters of credit and bank guarantees outstanding to secure our casualty insurance program and other contractual commitments, and we had $76.9 million of borrowings outstanding under our credit facility.

In addition, at the end of the quarter, we had approximately $144 million in cash with approximately $44 million in US funds and $100 million relating to our foreign operations. Including our cash on hand and availability under our credit facility, we had nearly $1.1 billion in total liquidity as of September 30, 2014.

Concerning our outlook, we expect revenues for the fourth quarter of 2014 to range between $1.95 billion and $2.05 billion, and diluted earnings per share to be $0.46 to $0.48 on a GAAP basis. Included in our estimate of GAAP diluted earnings per share for the fourth quarter of 2014 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 limitation periods during the quarter. These estimates compared to revenues of $1.82 billion and GAAP diluted earnings per share of $0.77 in the [fourth quarter of 2013], which included a $0.32 per diluted share impact from the gain on the sale of Quanta's equity interest in Howard Midstream Energy Partners, coupled with the net tax benefit of approximately $0.03 per share from the release of income tax contingencies in Q4 2013.

Our GAAP EPS forecast for the fourth quarter of 2014 includes an estimate of $7.8 million for non-cash stock based compensation expense and $9.5 million for amortization expense. Excluding these expenses, our non-GAAP adjusted diluted earnings per share for the fourth quarter of 2014 is expected to be $0.50 to $0.52, and compares to our non-GAAP adjusted diluted earnings per share of $0.50 in the fourth quarter of 2013.

We are currently forecasting net income attributable to non-controlling interest to be approximately $2 million to $3 million in the fourth quarter of 2014. For additional guidance, we are currently projecting our GAAP tax rate to be between 32% and 33% in the fourth quarter 2014, and our diluted share count to be about 219.9 million shares. It's important to note that we exceeded our third quarter expectation, in part due to some revenues being pulled from the fourth quarter into the third quarter due to solid production this quarter.

With that said, with respect to the Company's fourth quarter outlook, we do see growth in electric power revenues when compared to last year's fourth quarter, and a degree of normal fourth quarter seasonality when compared to the third quarter of 2014 revenues. However, although our margin expectations are still within our normal 10% to 12% guidance for the segment, certain projects reached or neared completion during the fourth quarter. With fourth quarter weather variability, we've tried to prudently consider these potential dynamics in our guidance, and currently anticipate margins at the lower end of our 10% to 12% range.

With regard to the oil and gas segment, the timing of mainline projects is such that less work is occurring in this year's fourth quarter versus last year's fourth quarter, as well as the earlier quarters of 2014. This project timing likely will lead to little or no revenue growth in the oil and gas segment in comparison to the prior year's fourth quarter, which we anticipate will lower margins for Q4 2014 to the upper-single digit range.

Taking into consideration the results of the third quarter and our fourth quarter guidance, we currently anticipate GAAP diluted earnings per share for the year to be between $1.51 to $1.53. In addition, we anticipate non-GAAP adjusted diluted earnings per share to be between $1.97 to $1.99, which is slightly higher than the midpoint of our original 2014 annual guidance for adjusted EPS, and represents growth of approximately 16% as compared to last year's adjusted EPS of $1.71. 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 expect CapEx for all of 2014 to be approximately $320 million to $330 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 repurchase of Quanta stock. This concludes our formal presentation, and we'll now open the line for Q&A.

(Operator Instructions)

We'll take our first question from Tahira Afzal from KeyBanc.

Congrats on a good quarter.

Thank you, Tahira.

I guess the first question was going to be on fourth quarter guidance, but I think that was very eloquently explained by Derrick, so I'll move on to the other two questions I had. First one is just on free cash flow outlook into next year, if you can provide any guidance versus where net income should be. Should we see both converging into next year?

Jim, given your stock over the last, currently is trading probably at the low end of its five-year historical (inaudible) every metric. Could you talk a bit about cash allocation and repurchases? We didn't see much in this quarter so that's my first question.

Yes, Tahira, this is Derrick. Relative to 2015 cash flow, the working capital demands of our business are usually the first place that are the biggest driver relative to cash flow in general. When I look at 2014, at this stage in the game I would expect that I have a strong fourth quarter cash flow, but I don't think I'll get to the level of saying that I have cash flow comparable to 2013 for this year partly because of the dynamics of that working capital. I still think overall cash flow will continue to be strong. I think the 2015 is probably something that's going to be an order of magnitude from a contribution perspective in the same ratios that you've seen relative to the 2013 type dynamic.

Relative to stock repurchase, we're opportunistic for stock repurchase. We have a much broader program, a $500 million program. We did do $45 million last quarter. You're correct; we did not buy back any stock this quarter. Lots of things influence that between the timing of awards, timing of cash flow of projects, acquisitions, any number of different factors taken into consideration, but we do think that we'll be very opportunistic relative to stock repurchases as we go forward.

Got it, thank you. Jim, the second question is really in regards to pipeline space. You've talked that you've received some long term agreements that were anticipated from key clients, so congratulations on that. Typically, when you've done agreements such as these in the past on the transmission side, you've seen some incremental bookings alongside it. If you can comment on the timing of initial bookings for these particular agreements, and as you see the construction starts with some of this work into 2015?

It's a good question, Tahira. I think it's going to be a mix. You're going to see some projects move into backlog which will be reflected as we move through 2015. I think you'll see strong backlog in mainline, but also under these agreements some of the projects that have potential to move to construction over the next several years won't be put into backlog until we're certain they move to construction. It will be a mix of projects going into the backlog, and then the opportunities under these agreements to build programs that won't go into backlog until there's more clarity on those programs going forward.

We'll take our next question from Steven Fisher with UBS.

Great, thank you. The oil and gas margins were strong in the quarter, and annually they've been rising. What's your confidence that the margins there can continue to improve from the 2014 levels? I know you mentioned capacity and the market's going to be pushed to its limit, or should we just be thinking about overall profit dollars?

Steve, I think that we've talked about the contribution of mainline will continue to push us into the opportunities of the 9% to 12% range. You've seen that within this year most specifically in the second and third quarter which was largely because of those mainline contributions.

Our historical performance in that space is such that we have seen that 9% to 12% margin on that execution on mainland. As we go into 2015, I think a lot of Jim's commentary is [first]. You've got larger contributions, so I think those combinations puts us very comfortable that we'll be within that range.

Okay. How long does your backlog in Canadian pipeline extend right now? When do you need to start replenishing that? Then, how do you think about how that business fares there on a lower price environment?

I wouldn't say it's a lower price environment. I would say that the price environment in mainline is going to be strong going forward. I would say that most the backlog that we have today in Canada is in 2015. We do have some that spills into 2016, but I think as we move through the year, next year, you're going to see backlog build in mainline, and it could have a multi-year feel to it.

Sorry, Steve, I misunderstood your question. On the low price of oil, I think that there's a couple things here. One, I think people forget that pipeline is the most cost effective way to move products. In some way, this is positive for the pipeline market because rail and trucking of commodities or oil is going to move into not being very cost effective under the current price of these commodities. Secondly, many of our customers have longer term agreements with shippers that are in place today.

They wouldn't have started spending the capital that they have on some of these programs to get permitting and siting done and buying product and so forth if they didn't have commitments from customers, so I'm pretty confident at this point in time that many of the projects and opportunities we see are going to move forward. That's not to say that the further decline in oil pricing could impact our business in some areas, but I do think that we're going to have quite a bit of activity in 2015 and beyond on mainline pipe.

Next we'll move on to Noelle Dilts with Stifel.

Hi, thanks. Good morning. I just wanted to stick with oil and gas for my first question. I thought there were positive comments on Australia that you gave in your comments and was hoping you could expand upon the opportunity set that you're seeing there. Then if you could discuss just the relative amount of bidding activity and opportunities you're seeing in again Canada versus the US?

Noelle, right now in Australia, it's been the same story, the same market. It's that coal seam gas market. It's been very active for us. It has the multi-year feel. We're the primary contractor from a market position in Queensland, building the pipeline infrastructure, so it's been a very good market for us. It's very consistent, and we do see some growth opportunities there.

Canada, I would say that Canada and US, the mix of the opportunities that we see on mainline pipe are probably equal right now across Canada and the US going forward. There's activity throughout North America that we believe will ramp up in 2015 and beyond.

Okay, great. Then shifting to transmission, I think if you look at the awards that we've seen this year in the public sphere, transition awards have been I think lower than folks expected maybe heading into the year. I guess my first question is, is that what you're seeing in the market, or because you negotiate so much work, are you still seeing a lot of activity and growth in the US transmission market? Then the second piece of that would be if you're expecting awards to accelerate here in the last couple months of the year and into early 2015?

One of the good things about being at Quanta is we do have these relationships with many of the investor owned-utilities and Canadian (inaudible) and utilities, so we do have a view of what their multi-year transmission programs are. We're building the majority of the big projects, and we pretty much build transmission whether it's large announced projects or smaller projects for most of all of the investor owned-utilities in the United States, so we see transmission activity continuing to be strong.

I wouldn't relate that to just large project awards as being the barometer as to whether we've peaked or whether the business is falling off. We don't see that right now. We see continued large projects and certainly smaller projects that have momentum, and we feel comfortable that at least through 2015 that transmission continues to have a growth feel to it.

We'll take our next question from Jamie Cook with Credit Suisse.

Hi, this is Andrew on behalf of Jamie. Just a quick question back to your transmission side, you guys said Q4 margins are trending more towards the lower end of the 10% to 12% target. Then if you take into account Q2 where margins played out there, and then in Q3 you're in line but including the charge you're below that targeted range. How do you guys feel about, I know you don't give 2015 guidance, but how do you feel about your confidence of getting the margin level back into that targeted range, and what do you see in terms of the market or in terms of what Quanta is doing to improve that?

This is Derrick. We feel very comfortable with our 10% to 12% range. We've been executing within that range for quite some time. The second quarter was a real anomaly, from the weather perspective as it relates to the dynamics that it had on production.

If you recall, there was just an extremely difficult winter. That breakup came into play in that second quarter, but when I look back over the quarters of the last several years, we very strongly fit within that 10% to 2% range, so I continue to believe that as we go into 2015 and beyond, that we'll continue to execute solidly within that range. The fourth quarter dynamic is such that we may be still yet slightly on the lower end of that range, but I think you'll still see that we feel very comfortable that it will exceed the 10% range.

That's helpful. Then long term switching to your oil and gas segment, I know Mexico has been a topic given the potential in that market. Are you guys doing anything strategically now to align yourselves in that region? Then in terms of a timeline, do you guys see this becoming impactful in 2015 or 2016? What's your thinking as of lately?

We're certainly evaluating the Mexican market. There's going to be significant infrastructure built there. The main thing that everybody needs to remember is that just is another factor on the strain on capacity that's available to build pipeline in North America.

We see plenty of opportunity to build pipeline in Canada and the United States. We're certainly evaluating Mexico. You can hardly not because it's such a big opportunity, but right now preferred place to build infrastructure is Canada, the United States, and in Australia.

Next is Andy Wittmann with Baird.

Hi, thanks for taking my questions. Derrick, I wanted to get a better sense of the acquisitions that were completed in the quarter. Could you give us perhaps the backlog contributions to the two primary segments as well as the revenue contribution in the quarter from acquisitions in total?

Yes, the combined acquisitions for the quarter were probably a run rate of $200 million to $250 million, and as of September 30, what I'd say from a backlog perspective, they probably were about, say, $100 million in total backlog contributions. I'd call that 25% probably electric power and 75% oil and gas.

Got it. That's helpful. Thank you. I guess to dig into the pipeline segment a little bit more, you mentioned that a lot of the gathering work that you do is in natural gas developments primarily. Derrick, it would be helpful if you could help us get a relative sense about what percentage of your overall pipeline business, maybe on a year-to-date basis, has been gathering, put that in broader context for us?

I would say, Andy, that gathering is running about a billion dollars a year in revenue, maybe a little bit better than that. That gives you a sense when you look at the overall segment what gathering's contribution is.

Our next question comes from Vishal Shah with Deutsche Bank.

Hi. This is Jerimiah on the line for Vishal. Thanks for the question. I wanted to delve a little bit more into the geographic breakdown. Obviously, you guys have moved into Australia. I'm wondering if you're seeing any shift more towards Canada and Australia away from the US in both of the major segments?

This is Derrick. Canada right now has grown and is now towards probably getting close to a 20% type range, and Australia is probably a little less than 5%. I think as we go forward right now, I'd expect those relative contributions to stay approximately the same for the near term. Okay. That's helpful. Then also to the extent that you can talk about it, I just wanted to touch again on the mainline agreements that you guys signed. What's the margin profile that you're thinking about there as you start to put that into backlog?

The mainline pipe opportunities that we see under these agreements, as Derrick stated earlier, if we execute on that amount of mainline, it should get us well into the 9% to 12% operating income range, provided we execute. I always say that mainline pipe is to the oil and gas segment like electrician transmission projects are to the electric power segment, so if we get a good volume of mainline pipe occurring next year which we're on the road to having a good amount of mainline pipe occurring next year, we have the opportunity to be well within the 9% to 12% operating income range for the segment.

Next we'll move on to Adam Thalhimer with BB&T Capital Markets.

Good morning, guys. Nice quarter.

Thank you, Adam.

I wanted to ask first on Keystone. If that moves forward, how should we think about that for you guys on the pricing side? Maybe you can just refresh us. That was a job you announce back in 2011. Contractually, if that moves forward, talk about what we should be thinking there?

We aren't thinking about Keystone right now, so it's off the radar right now for us. TransCanada would have to announce that they're moving forward with it, and I don't know where they are with that, to be honest with you. Obviously if Keystone moved forward, it would fit the pricing profile of all of our other mainline pipe programs.

You're not locked into some 2011 price?

No. No pricing or no contract was signed on Keystone. It was just a joint venture that was working toward, that was put in place, that would execute on Keystone, but nothing was signed or committed to on pricing contractually on that project. The project was rerouted anyway. It's not even the same program as it was early on. Anyway, that's a TransCanada question. Certainly if it went forward that would be great for us potentially, but we really can't comment on Keystone right now.

Derrick, the revenue guidance you gave for the oil and gas segment, I think, you said down year-over-year. Is that organic or is that all-in?

No, I said it may be flat to down, but that is all-in. We had substantial contributions last year from a mainline perspective, and in the fourth quarter of this year will likely be the lowest contribution for out 2014 as well as compared to last year. It's really just the timing of where those projects fall. As we talked about earlier in the year, we saw a number of the mainline projects looking like they were going to push into 2015, and it's impacted what we see from the quarter-over-quarter comparison.

I wouldn't read anything into that, Adam. We always talk about quarter-over-quarter fluctuations in our business, and when you look at the fourth quarter and you look at our pipeline business, I would not read anything into it being flat or slightly down from a prior period. I think you need to look at the opportunities that we have on a longer term basis, and there's certainly opportunities out there to grow that business as we move into 2015.

Our next question comes from Dan Mannes with Avondale Partners.

Hi. Good morning, everyone.

Hi, Dan.

Just a quick follow-up on mainline, you've locked in I guess these long term arrangements, and your [tone] on 2015 is pretty upbeat, but can being talk maybe about timing concerns you may have on 2015, given a couple of the large projects slated for 2015 are still subject to some permitting issues. Is that something that could impact you, or are the projects that you're tagging pretty firm at this point?

No, that's always a concern, for us and our customers, that projects can get pushed. I think we're pretty comfortable that many of these projects have moved far enough along in that process to where we're going to have a nice uptick in mainline pipe activity next year. I think the risk is a lot less than what obviously it was a year ago because many of these projects have been moving forward with the permitting and siting process. We're pretty comfortable where we stand today, but that doesn't mean something can't happen to push these projects to the right. At this point in time, we're pretty comfortable that we're going to move, these projects will be moving to construction next year.

Then real quick, just a follow-up on the fiber business, obviously you're in a bit of transition as you offer more lit services. It's just hard to tell from the outside because it looks like numbers have been pretty flattish year-over-year or even down a little bit in spite of the investment. Can you maybe peel back the onion, and tell us a little bit more what's going on, on the core side relative to the ancillary? It's hard to see the benefit from the CapEx you're putting in the system.

Yes, I understand, Dan. It's a problem I continue to be plagued with. From clearly the ancillary telecom revenues that are in that segment create those fluctuations. The underlying fiber business itself, consistent with what we've been seeing in the last few quarters, is still growing at a mid-single digit range. It's just masked by those fluctuations in that ancillary telecom revenue at work which those are down because as we've talked about in the past, those just aren't strategic revenues for us as we stand here today.

We still believe that we'll be able to get back into a double-digit growth within that segment, probably at this stage of the game still yet in 2016. We've talked about previously when we rolled into lit fiber that it would take us about 18 months to see the contribution. We are seeing contribution today. Those revenues are coming online, and I do think that we'll continue to see those revenues increase such that we do think probably in the latter part, mid to latter part of 2016, we'll be back to double-digit growth within the segment, or the fiber business specifically.

Next we'll move on to William Bremer with Maxim Group.

Good morning, gentlemen. Nice quarter.

Thank you, Bill.

Given the very strong top line growth of the two segments, I'm just trying to put together in my mind, what type of capacity are you currently running at? Then I'm looking at your backlog and I'm saying to myself, how does that equate to 2015 and beyond? You guys have done a superb job here. I'm just trying to get a sense of how you're allocating your resources. Then my next question is, given that, how are the labor rates in these fields, and how they progressing?

Yes, to answer the second part of your question first, labor rates, most of the work we're doing is under multi-year agreements. When these agreements, these collective bargaining agreements come up for renewal or renegotiation, we're seeing rates that are fair, increases that are tied really to cost of living type increases, so the labor rates aren't getting out of control. Labor rates also get passed on to our customers when we have increases. Now that doesn't mean we aren't seeing some areas that have higher escalation which is overall, I think when you look at it collectively, there's fair increases across both the electric power and on the oil and gas side of our business.

As far as resources, I think one of the good things we do as an organization is because of our entrepreneurial business model and because we're not the low priced contractor, we do spend a lot of time and effort investing in people. We stay ahead of these growth curves, so we're out there developing the future leaders of the organization, both at the superintendent project management level, and we work very closely with the trades to develop the crafts people needed to meet the needs of the [field].

We've got a lot of work going on, a lot more than anybody else. A lot of this work requires, a lot of the development of people requires on-the-job training. We have that advantage too because we all work in 50 million plus hours a year in the field, we can accelerate development of people to move up through the trade as well, to be qualified journeymen, linemen, welders, or whatever. I'm not saying it's not challenging. It's a changing environment, but our Company is in probably the best position to develop people and to keep up with the growth opportunities than anybody else in the industry.

Right. Then one for you, Derrick, I notice you guys tapped the debt markets this quarter. Could you give us a little color on that? Was that because of the acquisitions, or is that the receivables, or can you just give us color what that's all about?

Much of it is all the things you laid out, working capital and the timing of acquisitions, but a big portion is also just the timing of when we received cash versus our ability to pay down the debt. We've been making payments against that debt even since quarter end, so a lot has to do with just the timing of when those flows were happening.

We'll take our next question from Min Cho with FBR Capital Markets.

Strong quarter. Most of my questions have been answered, but if you could just provide any additional details about the opportunities in one gigabit, along your power distribution business? As well, any additional details on your efforts on the offshore work?

Offshore is moving forward. It's pretty active. The development of deepwater and the work we're seeing in the shales, we've actually translated some. The company we bought in Houma, Louisiana, that has fabrication capabilities. We're actually expanding some of their capabilities on land opportunities, building production systems, and midstream facilities for customers. We're also offshore deepwater production systems, the mechanical hook-ups, all of that's increasing. We've got a niche market. We're in a niche market [there] that's performing well, and we see nice growth opportunities there.

On the distribution side, we're seeing for Google a lot of opportunities on their fiber rollout. Where we can do the power make-ready, much of this infrastructure is being put on utility poles, utility infrastructure, that has energized conductor. It requires a qualified journeyman lineman to do the power make-ready for the telecom contractors and, certainly that's a big opportunity for us moving forward.

Also, part of the growth on distribution is the continued replacement of the aging grid in many areas, storm hardening, and the opportunity to upgrade the grid infrastructure to accept some of the technology that's being rolled out, as far as the smart meter technologies or integrate distributed generation on to the grid. You've got various initiatives occurring across the United States and Canada, and our distribution business is going to continue to have a growth feel to it. We've probably grown that business at double-digit rates the last four years, and I don't see that business slowing down any time soon. We see positive momentum right now in all subsectors of each of the segments as we see it today.

Okay. Then also given the strong demand that you're seeing across all of your end markets, are you starting to see the pricing, any change in pricing? Are the margins in backlog still pretty close to what you're reporting right now?

Yes, the margins in backlog are comparable to what we're executing on today. When we have an opportunity to increase pricing, we do. Many of the relationships we have today are with strategic customers who have sophisticated procurement groups, and we're making acceptable margins there today. We're getting more scale, and we're helping our customers over time reduce cost and taking over more functionality from them.

Certainly, over time as we take on more responsibility there may be an opportunity to improve margins, but right now, with the strategic relationships we're in, we're making good margins. Certainly the scale is the important thing today in this environment is to continue to maintain that relationship and grow with our customers as their CapEx programs become significantly larger than what they've been historically over the next several years.

Next we'll move on to John Rogers with DA Davidson and Company.

Hi, good morning.

Good morning, John.

Jim, first thing is in terms of the oil and gas business that you've got, especially looking out into 2015, and I understand your comments, you haven't seen any real change in planning. How much of the business in your mind is tied to oil projects versus gas?

Most of our work in the Marcellus is as we stated in our prepared remarks were gas. That's where most of our work is occurring, and I would say that when we move into mainline, it's a mix. I wouldn't say oil is predominant or gas is predominant. We're just seeing a mix of opportunities to move product on mainline pipes. You really can't put your finger on it. I would just say where we are predominant on a fossil fuel, it would be on our gathering work in the Marcellus, is where we do probably 80% of our gathering. That's predominantly natural gas and natural gas liquids.

The mainline agreements that you have?

It's a mix. It's both moving liquids and gas.

Then the second question I guess is maybe for Derrick, spending on acquisitions, I haven't seen the Q yet, but where are you year-to-date, and what are you expecting into 2015 given your pipeline?

From a year-to-date perspective, total acquisitions, you say spending. I don't know if you're asking from a revenue or total consideration. I'd say from a consideration perspective, we're probably around the $250 million to $275 million range of total spend. Then from a run rate perspective, we're probably in the near or probably a little above our $400 million run rate revenue perspective.

I won't comment specific to anything between now and the end of the year. I'll just simply say that our acquisition program continues at a pace that's fairly comparable to what you saw in 2013 and what you're seeing on a year-to-date basis, such that I would say on a forward 12 months, you can still see revenue contributions in the order of magnitude of the $500 million range consistent with what you've seen in the trailing 12 month basis.

We'll take our next question from Mike Shlisky with Global Hunter.

Good morning. I wanted to ask you quickly about the new Nalcor project. Given the size of the project and some of it is in a fairly, I'd say out-of-the-way, location is there any change or any difference in this project with the start-up costs or the cadence of the (inaudible) the contract versus other smaller contracts?

No, every project is different. Obviously, this is a project that's in a very remote area, so we've got things we need to do to prepare to get our people and equipment in there. All of those costs are covered under contract, and they are in the total contract price. It doesn't matter how complicated or intense a [mob] or [demob] is, it's all priced into the contract under the same margin profile that we expect to get for our shareholders.

All right. Great. My other main question is just on your Company's storm related work. It's been a pretty light hurricane season, not a lot of main storms. That said, none of the big storms actually makes the national papers. I'm just wondering if you have any large storm projects here in the third quarter, and whether there was an increase or decrease over the prior year?

This is Derrick. We probably did roughly $30 million of storm work this quarter which is very close to what we'd originally forecasted. Year-over-year, I'd say that's up about $10 million as compared to last year. Right now, we're anticipating only about $100 million for the year, and we're right on course for that this year.

Next we'll move on to Brian Lee with Goldman Sachs.

Hi, guys. Thanks for taking the questions. To start, I might have misunderstood or misheard you but, Jim, can you clarify the comments around free crash flow for 2015? I thought you had said free cash flow should look similar for 2013 levels, but given that there should be much higher revenue and some margin expansion across the segments, I'm just wondering why there wouldn't be a much better profile heading into next year?

Yes, this is Derrick. We've yet to give financial guidance for 2015 which is what makes the getting into the specifics of the cash flow even more difficult. We historically don't forecast our cash flow, but my comments are really more along the lines of that when I think about 2013's overall contribution that I think that 2015 can be similar, just from a dollar perspective.

Cash flow is very difficult for us to forecast as it relates to the timing of projects and working capital demands, CapEx acquisitions, and then the like. I continue to believe that with the expansion of margins and the volume that we would continue to see an expansion of cash flow in 2015 over 2014, so I do agree with your comment.

Fair enough. Maybe just a follow-up on that margin commentary, I was also wondering, I know you alluded to it on prior questions, but how are you thinking about the 9% to 12% operating margin target, particularly for the oil and gas segment? The reason I ask is I would have expected a bit more expansion in this quarter, specifically given the big sequential increase in revenue, so maybe any color around the dynamics there would be helpful. Thanks, guys.

From the segment perspective, we ended up at 10% margins within that segment which is moving very firmly into our 9% to 12% guidance, so we continue to be pleased with the margin expansion we see. I think that we've seen as the mainline continues to contribute each period, we continue to see margin expansion. That's what gives us the confidence to think that when we get into 2015 that the 9% to 12% is something that's very achievable.

I think one of the differences is as well is that when we think about 9% to 12% for 2015, I think the level of mainline contribution is such that we feel like we may be able to be there from a year perspective, rather than just an individual quarter perspective. Part of that is the expansion of revenue which is going to have a better fixed cost absorption, and then as well as the execution on projects. We continue to feel confidence being able to get into that space of that 9% to 12% as we go forward.

Our next question comes from John Brats with Kansas City Capital.

Good morning, gentlemen. Jim, I have a question on the Sunrise project. Obviously, the charge was rather consequential this quarter, but when you look ahead, what have you learned? What are some of the things that you might have put in place, new systems, new controls that we don't see a recurrence of that, and most specifically do you take verbal assurances on change orders at this time? Or still?

I'll tell you that obviously there's always lessons learned when you go through something like this. We don't like being in this situation. I can't recall in the history of the Company that we've had a dispute at this level, and certainly, there's best practices that come out of it. A lot of times when you're out there in the field, and you're in the middle of trying to get something built under an extreme timeline, this used to be more of a handshake business, and things are changing. I think the environment's changed over the last five years since the recession.

Certainly, we've done a lot to put new processes and procedures and controls in place from the development and training of our people, and increasing and improving our project management capabilities. Documentation certainly is a big component of that to ensure we paper up any change in scope that can occur in the field. Yes, there are lessons learned here, and certainly you can look back on any situation. With that said, we're still pursuing the total amount of the client. This was a change in legal strategy as we're moving from what (inaudible) settlement to more of an arbitration environment. Yes, there are best practices, and certainly we've implemented those throughout the organization.

Do you think we'll see a final resolution in 2015?

Arbitration is supposed to occur in the second quarter of 2015, so we're hopeful that will bring finality to this, yes.

Thank you.

We've now reached the allotted time for this conference call. At this point, I would like to turn the call back over to management for closing remarks.

Yes, I'd like to thank you all for participating in our third quarter 2014 conference call. We appreciate your questions and your ongoing interest in Quanta. Thank you, and this concludes our call for today.

This ends today's conference. We thank you for your participation.