Quanta Services Inc (PWR) 2016 Q2 法說會逐字稿

Greetings, and welcome to the Quanta Services second quarter 2016 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded. I would now like to turn the conference over to your host Mr. Kip Rupp. Thank you. Mr. Rupp, you may begin.

Great, thank you. Welcome everyone to the Quanta Services conference call to review second quarter 2016 results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to have Quanta news releases and other information e-mailed to you when they occur, please sign up for e-mail information and 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 release and other investor materials, such as press releases, SEC filings, presentations, videos, audio casts, 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.

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A replay of today's call will be available on Quanta's website at quantaservices.com. Please note that in today's call we will present certain non-GAAP financial measures including EBIT, EBITDA, adjusted EBITDA, and free cash flow. In the Investors and Media section of our website, we have posted the most directly comparable GAAP financial measures and a reconciliation of the differences between these non-GAAP financial measures and the corresponding GAAP financial measures.

Please remember that Information reported on this call speaks only as of today, August 4, 2016, 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 difficult to predict and are beyond Quanta's control, and actual results may differ materially from those expressed or implied by any forward-looking statements. For additional information concerning some of the risks, uncertainties, and assumptions that could effect Quanta's forward-looking statements, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2015, 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. 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, and disclaims any written or oral statements made by any third-party regarding the subject matter of this call.

With that, I would now like to turn the call over to Mr. Duke Austin, Quanta's President and CEO. Duke.

Thanks Kip. Good morning everyone, and welcome to the Quanta Services second quarter 2016 earnings conference call. On the call I will provide an operational and strategic overview, before turning it over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a detailed review of our second quarter results. Following Derrick's comments, we welcome your questions. The environment we have been operating in has been challenging for the first six months of the year. In particular, our Canadian operations continue to experience the effects of a down market. We continue to make necessary changes in our cost structure to adjust to the market conditions, and believe we are on track to deliver on our expectations for the remaining six months of the year. However, the ongoing challenges on the power plant project in Alaska distorts the overall performance of our core operations. As disclosed in our earnings release this morning, we incurred additional losses on the power plant project in Alaska during the second quarter. Late in the quarter during the late stages of the commissioning phase, the project experienced a claimed force majeure event. We have also experienced further deficiencies in third party engineering, that caused changes to the plan's scope of work, as well as failures of other contractors operating on site. The combination of these issues resulted in a significant increase in estimated cost to complete the project. We are in the early stages of developing estimates for potential recovery for the items from the customer and other parties. I am fully aware that we have been discussing losses on this project for the last year. And we take the issue seriously. We are all disappointed that we have incurred additional losses on this project, and with the performance of the project overall.

We remain focused on completing the project. While our core electric segment performance in the quarter was solid, the power plant losses in the second quarter were not previously contemplated in our guidance, and as a result we adjusted our full year guidance to reflect in impact. We continue to have a positive long-term outlook or for our electric power segment, and remain focused on restoring our operating income margins for the segment to historical levels.

We continue to believe Quanta's market-leading position, coupled with industry dynamics, such as an aging grid that requires significant investment to maintain reliability, the generation mix shifting to more renewables and natural gas, and the implementation of existing newer more demanding government regulations, should provide opportunities for our core transmission and distribution operations to grow.

We will continue to build our base transmission and distribution business, while remaining nimble to capitalize on large multi-year project opportunities that develop, as evidenced by the two large electric project awards announced this morning. In June, Quanta was chosen by a Midwest utility to construct a new 100-mile double circuit 345-kilovolt transmission line in its service territory, our scope of work includes access roads, foundations, steel pole erection, wire stringing, and material management. Construction began in late June, and the project is scheduled to complete in the third quarter of 2018. Incremental to electric power backlog at the end of the second quarter, is the large electric transmission and distribution project awarded to us by a California-base utility that we signed a contract for in July. Our scope of work includes the engineering, procurement, and construction of this project, including rebuilding and replacing approximately 145 miles of 12 and 69-kilovolt underground and overhead electric power infrastructure. The project is located in a National forest area in southern California. Engineering and related services for this project has begun, and completion is anticipated in late 2019. The aggregate contract value of these two projects is approximately $500 million.

We continue to see substantial bidding activity, and are pursuing a number of additional large high voltage electric transmission projects in both Canada and the United States. As the industry leader in providing solutions for large high voltage transmission projects, we believe Quanta is well-positioned to capitalize on the project opportunities we see in the marketplace. Also, you may recall that several years ago Quanta partnered with American Electric Power, or AEP, to upgrade approximately 240 miles of their 345-kilovolt transmission infrastructure in south Texas. The line remained in an energized state using our patented energized technologies. For this project in June, AEP won the Edison Electric Institute's 2016 Edison Award, the electric power industry's most prestigious honor. Quanta is proud to have partnered with AEP, and we appreciate the confidence they placed in us to provide them with a safe innovative and cost effective infrastructure solution. Turning to our Oil and Gas segment. Revenues and margins in the second quarter were softer than anticipated, primarily due to permitting delays on several large pipeline projects in our backlog, and to a lesser extent due to certain negative project conditions. As discussed on prior earnings calls, we expect improved performance for the segment as we move through the year. With the second half of the year being meaningfully stronger than the first half, driven by a significant increase in large pipeline revenue contributions. In the second quarter, three of our large diameter pipeline projects were waiting for client authorization to commence work,.

The authorizations were contingent upon the customer receiving certain government permits, which have taken longer to obtain, and have pushed anticipated construction start dates from the second quarter of this year to the third quarter. We have since received authorization to begin work on one of the ,projects and believe we can complete the project within our original estimates for the year. For the remaining projects, communications with our customers indicate that work is probable to move forward in the third quarter, which is what is reflected in our current guidance. While project delays generate headlines and the impact of project timing starts, we believe on a macro level, such delays coupled with the healthy end market drivers and strong demand for our large pipeline project services, could yield an active pipeline market that could prove to be a longer and more consistent, rather than a relatively short boom and bust cycle. And as LNG export facilities come online in North America and export volumes increase, we expect additional large pipelines will need to be constructed later in this decade to feed considerable volumes of natural gas to those facilities. While the LNG market is facing challenges due to low oil prices, it is a market we are watching with cautious optimism. The large pipeline market remains very active. We continue to work with our customers on large additional pipeline projects, and have visibility into significant project activity for the next several years. While some projects are experiencing permitting environmental delays, others are successfully receiving FERC and other approvals, and are progressing forward. The bidding and negotiating environment is robust, and the majority of our project opportunities in the United States continue to be driven by natural gas. In addition, we are experiencing increasing and ongoing levels of discussion with various customers about large pipeline projects in Canada. Regarding some of the other services we provide in our base business that are reflected in the Oil and Gas infrastructure services segment, demand continues for our natural gas distribution and pipeline integrity services. And we believe there are attractive growth opportunities for many years. Increasing natural gas demand and new pipeline safety regulations should continue to drive multi-year opportunities in the natural gas distribution market, as customer integrity programs continue to accelerate. As expected our Midstream gathering activities are down meaningfully versus prior years. This is primarily due to the lack of takeaway capacity to move natural gas out of the production areas in the Marcellus and Utica Shales to market, and lower commodity prices for natural gas liquids. Challenging conditions in Canada due to low oil prices have also impacted our Midstream gathering business. However, we believe that this market is beginning to stabilize.

In summary, we continue to have a positive multi-year yew on the end markets we serve, and believe we are all well-positioned to provide unique solutions to our customers. As discussed in our prior calls, we believed the first half of this year could be choppy, and it was. However, we expect a significant increase in activity levels and improved financial results in the second half of the year, which is supported by our strong backlog. In addition, we believe market conditions for our Canadian electric power and Oil and Gas infrastructure services operations has stabilized, and that those markets are in the early stages of recovery. We believe consolidation among our customers in both the electric utility and pipeline industries will be positive for Quanta going forward.

As our customers get larger, they are continuing to partner with Quanta because of our scope and skill, innovative solutions, and strong financial position. We are seeing the convergence of the electric utility and natural gas pipeline, which we anticipated years ago and are well-positioned to benefit from. Looking forward and market drivers, our entrepreneurial business model having the best skilled leadership and the largest skilled workforce in the markets we serve, will continue to distinguish us in the marketplace, and position us to continue to grow our core business over time. We see increasing activity and opportunity for the award of large high voltage electric transmission projects over the near and medium term, and the large pipeline project market remains robust with a multi-year cycle ahead of us.

This management team is focused on operating the business for the long term. We will continue to distinguish ourselves through safe execution and Best-in-Class field leadership. We will pursue opportunities to enhance Quanta's core business and leadership position in the industry, and provide innovative solutions to our customers. We believe Quanta's unique operating model and entrepreneurial mind set will continue to provide us the foundation to generate long term value for all of our stake holders. With that, I will now turn to over to Derrick Jensen, our CFO, for his review of our second quarter results. Derrick.

Thanks Duke. Good morning everyone. Today we announced revenues of $1.79 billion for the second quarter of 2016, compared to $1.87 billion in the prior year second quarter. Net income from continuing operations attributable to common stock was $16.6 million, or $0.11 per diluted share. These results compared to net income from continuing operations attributable to common sock of $32 million, or $0.15 per diluted share in the second quarter of 2015. Adjusted diluted earnings per share from continuing operations as presented in today's press release was $0.18 for the second quarter of 2016, as compared to $0.24 for the second quarter of 2015. Although Duke commented a bit on some items impacting our results for the quarter, I will provide some additional commentary before discussing the detailed financial review.

As pointed out in today's earnings release, the power plant construction project in Alaska negatively impacted the quarter by approximately $30.5 million in project losses, or $0.12 per diluted share. At quarter end this project had a contract value at $201 million, and was approximately 90% complete. This project is expected to be substantially completed near the end of the third quarter of 2016.

As the project continues through the final commissioning phases, it is possible that additional unforeseen circumstances or other performance issues could occur, and result in the recognition of additional losses on this project. However, our current estimates represent all issues known at this time. The year-to-date project losses on the power plant are $51.8 million, or $31.6 million net of tax, and $0.20 per diluted share, and have impacted the year-to-date electric power segment operating margins by approximately 220 basis points. We are in the process of developing claims related to these losses, that resulted during and even prior to the second quarter. However, we have not reflected any damage recovery in our estimate of total project loss.

Our results for the quarter were also negatively impacted by certain other items that were outside of our previous expectations. As Duke spoke of, we had lower overall reported revenues versus our expectations, which had a corresponding adverse impact on gross profit, driven large by shifts in the timing of the start date on certain large diameter pipeline projects, and to a lesser extent, a negative impact associated with the wildfires in Alberta, Canada. Additionally we had some slight overages in costs on existing projects within the Oil and Gas segment, some of which we will be seeking to recover through future change orders, but otherwise negatively impacted the quarter by around $0.02.

Lastly, our tax rate for the quarter and year is higher than anticipated, due to the current estimate of the mix of our annual earnings being more heavily weighted to domestic rather than foreign operations, as well as the effect of a reduction in expected tax benefits from foreign restructurings, which were originally expected to benefit the entire year, but now won't be a benefit until the third quarter. These tax items impacted the quarter by approximately $0.02.

Turning to a broader discussion of our quarter-over-quarter results, the decrease in consolidated revenues in the second quarter of 2016 as compared to the same quarter last year was primarily associated with the decrease in larger electric transmission and larger diameter pipeline projects, as customers continue to face heightened regulatory and environmental requirements from state and federal agencies, and more stringent permitting processes.

This increased regulatory environment impacted the timing of existing projects, and delayed the development of other necessary infrastructure projects, which has had a corresponding negative impact on the level of demand for our services. Partially offsetting these decreases was the favorable impact of approximately $40 million in revenues, generated by acquired companies, primarily in our electric power infrastructure services segment. Our consolidated gross margin was 11.2% in the second quarter of 2016, as compared to 12.2% in the second quarter of 2015. This decrease was primarily due to the previously mentioned decrease in revenues from larger electric transmission projects,and larger pipeline projects, which typically yield higher margins. In addition, the higher cost on existing projects within the Oil and Gas segment as compared to last quarter and the lack of corresponding change orders on these costs impacted margin comparability. Gross margins were also impacted by losses on the power plant project of $30.5 million in the quarter, which compares to $25.1 million of losses during the three months ended June 30, 2015, related to the same power plant project, and an electric transmission project in Canada.

Selling, general and administrative expenses were $156.6 million in the second quarter of 2016, reflecting an increase of $6.7 million, as compared to the second quarter of 2015. This increase was the result of $2.8 million in higher costs associated with ongoing technology and business development efforts, and $2.2 million in incremental G&A costs associated with the acquired companies. Selling, general and administrative expenses as a percentage of revenues were 8.7% in the second quarter of 2016, as compared to 8% in the second quarter of 2015. This increase was due to the slightly higher G&A costs as well as the reduced revenues for the second quarter of 2016.

To further discuss our segment results electric power revenues were $1.16 billion, reflecting a decrease of $63.2 million quarter-over-quarter, or approximately 5.2%. Revenues during the second quarter of 2016 were negatively impacted by continued regulatory constraints on the volume and timing of customer spending, as compared to the second quarter of 2015, which included higher levels of revenues from larger transmission projects that were nearing completion.

Foreign currency exchange rates also negatively impacted second quarter 2016 revenues in this segment by approximately $8 million. These negative factors were partially offset by the contribution of approximately $30 million in revenues from acquired companies. Operating margin in the electric power segment decreased to 6.6% in the second quarter of 2016, as compared to 7.2% in last year's second quarter. This decrease was primarily due to the previously mentioned reduced revenues from larger electric transmission projects, and the corresponding increase in lower margin revenues from smaller scale transmission work. In addition margins are negatively impacted by certain large transmission resources being underutilized during the quarter, as we continue to bear certain costs to ensure we are positioned to execute on larger transmission opportunities. As I mentioned previously, operating margins for the second quarters of both 2016 and 2015 were negatively impacted by project losses on one or two large projects. As of June 30, 2016, 12 month backlog for the electric power segment was relatively flat, and total backlog decreased slightly when compared to March 31, 2016, due to normal contract burn being effectively offset by new contract awards. Backlog as of quarter end does not reflect the large California transmission and distribution project announcement included in today's release. Oil and Gas segment revenues decreased quarter-over-quarter by $16.7 million, or 2.6%, to $633.3 million in the second quarter of 2016. This decrease is primarily a result of the fluctuations in large project timing I spoke of earlier. Segment revenues contributed by our international operations were also negatively impacted by approximately $6 million, as a result of less favorable foreign currency exchange rates. These decreases were partially offset by increased activity from distribution services, as well as the consideration of approximately $10 million of revenues from acquired companies. Operating income for the Oil and Gas segment as a percentage of revenues decreased to 1.9% in Q2 2016 from 5.5% in 2Q 2015. This decrease was primarily due to the timing of larger pipeline projects which typically yield higher margins, as well as a higher contribution from distribution services, which typically carry a lower margin profile.

Also negatively impacting operating income were higher costs associated with challenging site conditions on an ongoing transmission project in Canada, and a customer request for additional closeout efforts on a US transmission project that was substantially completed in 2015. While we intend to pursue change orders for additional compensation from our customers for certain of these items, no portion of these amounts have been included in our estimates of contract value as of quarter end. 12 month backlog for the Oil and Gas segment decreased by $47.8 million, or 1.9%. And total backlog decreased $273.7 million, or 7.4% when compared toMarch 31, 2016. These decreases were due to burn of backlog, partially offset by the positive impact of scope increases to various contracts. Corporate and non-allocated costs decreased $2.8 million in the second quarter of 2016 as compared to Q2 2015, primarily as a result of lower acquisition and integration costs due to the timing of acquisitions. For the second quarter of 2016, operating cash flow from continuing operations provided approximately $66.5 million, and net capital expenditures were approximately $55.7 million, resulting in approximately $10.8 million of free cash flow, as compared to free cash flow of approximately $51.4 million for the second quarter of 2015. Free cash flow for the second quarter of 2016 was negatively impacted by the less favorable operating results.

Cash flows from operations for the six months ended June 30, 2016 provided approximately $266.3 million, and net capital expenditures were approximately $98.3 million resulting in approximately $168 million of year-to-date free cash flow. Despite fairly strong year-to-date free cash flow unbilled production hung up in the approval process with a few customers has kept our working capital requirements a bit higher. We expect to see some resolution to these billing delays during the third quarter. However the ramp-up of the large diameter pipeline work in the latter half of the year is expected to be a use of cash, so it remains difficult to estimate the overall free cash flow for the year. DSOs were 74 days at June 30, 2016, compared to 75 days at December 3, 2015, and 85 days at June 30, 2015.

At quarter end, we had approximately $162.3 million in cash. The end of the quarter we also had about $317.3 million in letters of credit and bank guarantees outstanding to secure our casualty insurance program and other contractual commitments, and we had $398 million of borrowings outstanding under our credit facility. Leaving us with approximately $1.26 billion in total liquidity as of June 30, 2016.

Turning to guidance, for the year ending 2016 we expect consolidated revenues to range between $7.75 billion and $8.0 billion. This range contemplates electric power segment revenues ranging from a 3% decline to year-over-year at the low end of our guidance, to revenues in the segment remaining flat at the higher end of our estimates. With the remaining difference in revenues coming from growth in the Oil and Gas segment.

As it relates to seasonality we continue to expect a market increase in revenues and margins as we move into the third quarter, largely driven by the timing of large diameter pipeline work. Additionally, due to some of the project timing issues that Duke spoke of earlier, we believe the fourth quarter revenues may not decline as we have seen with typical seasonality in the past, but instead will likely increase when compared to this year's third quarter. For 2016 we believe the electric power segment operating margins should be around 8%, with the year-to-date losses of the power plant of $51.8 million having a negative impact of approximately 100 basis points on the overall operating margin for the segment. We still see the Oil and Gas segment margins coming in between 5.5% and 7% for the year, but due to the lower margins seen in the first and second quarters of 2016, the upper end may be more challenging. Also due to the revenue shifts mentioned earlier, margins in the Oil and Gas segment are likely to be higher in the fourth quarter than the third quarter.

Our outlook includes estimates for project start dates that we believe are probable based on customer communications. However, variances in these estimated start dates could lead to revenues and earnings results that may be materially different from our current estimates. In addition, some of these projects are larger in contract value, such that the performance of any individual project that significantly exceeds, or is less than our current estimates could also impact our earnings results materially.

Lastly, our outlook does not assume any recovery of the project losses recognized to date on the power plant project, even though the Company is pursuing various remedies for recovery. We estimate that interest expense will be between $15 million and $17 million for 2016, and are currently projecting our GAAP tax rate for 2016 to be around 39.5%. The third and fourth quarter rates will be around 38.5%. Also our annual 2016 guidance reflects the current foreign exchange rate environment, fluctuations of foreign exchange rates could make comparisons to prior periods difficult, and cause actual financial results to differ from guidance. For purposes of calculating diluted earnings per share for the year ended 2016 we are assuming 157.1 million weighted average shares outstanding. We anticipate GAAP diluted earnings per share from continuing operations for the year to be between $1.20 and $1.35, and contemplate non-GAAP adjusted diluted earnings per share from continuing operations to be between $1.52 and $1.67. I believe it is important to note had it not been for the incremental impact of the second quarter loss from the power plant project in Alaska, our previous annual guidance would have remained unchanged.

CapEx for all of 2016 should be approximately $200 million to $220 million. This compares to CapEx for all of 2015 of $210 million. We expect to continue to maintain our strong balance sheet and financial flexibility, positioning the Company for continued internal growth, and the ability to execute on strategic initiatives. Overall our capital priorities remain the same, with the focus on ensuring adequate resources for working capital and capital expenditure growth, and an opportunistic approach towards acquisitions investments, and the repurchase of Quanta's stock. This concludes our formal presentation, and we will now open the line for Q&A. Operator.

(Operator Instructions). Our first question comes from the line of Tahira Afzal with KeyBanc Capital Markets.

Hi.

Good morning.

I apologize. Something happened. Our next question from the line of Matt Duncan. Please state your question.

Hi, good morning, guys.

Good morning.

Good morning, Matt.

First question I have got is really just kind of big picture on the electrical business. Does it feel like that business may be turning a corner here? My recollection is that you had only been working on one larger job, and I know a year or two ago that was more like 10, these two that you announced today are going to take that up to 3, the Fort Mac job is going to start pursuing it later this year, early next year. Seems like we may be turning a corner here, but just kind of want your updated thoughts there?

I think we would say is that we believe that the Canadian markets are stabilizing, which is what was somewhat of a drag on our earnings power in the segment. We will be starting on those three projects the second, we are started on the second, and we will be on the third here shortly. And some pre-engineering has been done on that one. Yes, I mean I think we are starting to see these projects in our base business in that segment as we said in the past continues to build. Less the power plant, we feel like we are moving forward with that as expected. I think we stated in the past that the first quarter would be choppy and it was, and again, we are moving as expected in the segment.

Okay. So taking everything into consideration then Duke, is it fair to assume with the way things are turning there, that we ought to expect some measure of growth in 2017, it is really just going to be up to the permitting process to determine how much?

Our backlog would be indicative of that. But again, we will watch the project starts, and make sure they move into full production. Again, our base will grow everything that we see in our backlog indicates that the projects there are. We will have to evaluate where the permits come in, and when they start.

Okay. On the Oil and Gas side just trying to get a sense for sort of delays it sounds like those are really just permitting related, rather than the customer kind of slowing anything down. Can you maybe tell us a little bit more about the timeline of when you expect the two that haven't yet started up to get started? And if for whatever reason one of those slid out of this year, what kind of impact could that have relative to your guidance?

Yes, I mean again, we are started on all of the projects but two, and the two that we haven't started on, we are in constant communications with our customer, and believe those will start the second half of the third quarter is what I would say just to characterize it. So I don't want to get too specific on it, other than just to say the second half of the third quarter, and as those move into construction, we will, I believe our guide contemplates that. As far as what happens if they move out of the quarter, again we would have to come back and communicate what that means, and evaluate where we are at on all of the other projects, to decide what kind of guidance we would give on that, and we would come back if it changed materially.

All right. Thanks guys. I will get back in queue.

Our next question from Tahira Afzal with KeyBanc Capital Markets.

Hi, guys. Am I on for sure this time?

Good morning.

Good morning. Yes you are on.

Okay. Duke for many years you guys have had a very good execution history, and we were hoping as you take over the rounds, that we would start to see that come back. Can you talk a bit about ownership, if we continue to really see, obviously the last project will be essentially done, but these pipeline projects which were just $0.02 this quarter, that is a pretty core business for you. Who has ownership there? What happens if those continue to mount?

Yes. I have ownership in all of them. They eventually get to me and they are my ownership, so again, I take responsibility for every project we deliver. The power plant is not core to us, it is not indicative of what is in our backlog, and we don't have any binding proposals on power plant work, combined sago power plant work, we do not have any proposals out there.

If you look at the rest of the backlog in the electric power segment, it is very core to us. Many of these companies have been in business 50 years-plus. Some 100, and we understand that business very, very well. The power plant was not something that was core to us, and it has distorted our results, and we have not executed well on it, as you have seen. We also have claims on that job that we have not pursued, and we will. And also in the pipeline, I would say again, we are very proud of the management team we have, we have executed in the past on large pipeline projects. If you go back to 2010, and past when we had this many spreads running on large pipeline projects, we executed very well. I expect us to execute very well as we move forward. The market is robust, we continue to bid work, and I think from our standpoint what is in our guidance is an accurate reflection of where we are at as a Company.

Duke, maybe you can provide a little more color on those $0.02 on the pipeline side where the impact came in, and maybe that will have to some degree? And then on the positive note would like to get more color on what you are seeing on the electric transmission side? Probably the most encouraging commentary I heard from you guys in a little while in the near term. Any color on that would be helpful as well?

From my standpoint when we gave year guide we anticipated the back end to be accelerated due to the large pipeline projects. If you take out the power plant from our year, I think we are on track to deliver what we thought we would deliver for the year. And again, the power plant has distorted who we are as a Company this year, and if you take it out, I think our guidance is intact, and that is how I feel about it as we move forward.

As far as the electric power business, we are optimistic. We are seeing some signs of the large HVDC market starting to improve. We continue to bid work and the jobs we are on, we are executing well, and again that is our core business. And our base in that segment continues to build. We are also seeing our base in the natural gas business continue to build. So as far as I am concerned we are proud of our base business, and we will move forward in that.

Our second quarter Oil and Gas margins will improve due to the work mix with the large pipeline projects coming on, and significant amount over 10 in production, you will start to the Oil and Gas margins turn the corner the other way just on work mix alone. I know the fourth quarter we can see it as well. The fourth quarter is loaded with different kind of margin profiles, and we do understand that.

Thanks,Duke.

Our next question comes from Chad Dillard of Deutsche Bank.

Good morning.

Good morning.

So I just wanted to spend some time on the gathering side. At the start of the year you guys were down 50%. And then I just wanted to get a sense for how you are tracking against those expectations, and you mentioned a little bit of stabilization. Do you think you will be able to hit break even on comps at the end of this year and how should we think about that for 2017?

Yes, I think again from our standpoint on the gathering business, we didn't expect to be robust this year as expected. Our Canadian market in that side of the business is softer than what we expected just in general. The fires did impact that as well. We'll have to evaluate where that goes in the second half of the year. But in the lower 48, the Marcellus and the Utica, for that matter in most places, it is all about takeaway capacity and the commodity pricing. As we get big pipe built, which offsets anything that we anticipated in the downturn of the midstream market, we should move forward. Again I think we are at pretty low points there, and have the opportunity to move up as we move forward into the future years.

And I just wanted to circle back on the Canadian wildfires. I apologize if I missed it, but did you call out what the impact was to earnings for the quarter? And then conversely, how big of an opportunity is the repair and restoration work for you guys over there? And is there any of that contemplated in guidance?

Yes, again, thankfully all of our employees were safe in the fire, and our customers were safe as well, and our guys did a nice job of helping each other out up there, so we are proud of that. As far as financially, I don't think there is some minimal impact. Derrick will come back and comment on that. There is some restoration in it. It is not meaningful in my mind as we move forward in the year. Derrick.

As it relates to the quarter it is probably around the $0.01 range unique to the wildfires.

Okay. Thank you very much.

Our next question comes from Dan Mannes of Avondale Partners.

Good morning, everyone.

Hey, Dan.

A couple of quick follow-ups and maybe I misheard I think it was in Derrick's some commentary about site conditions and transmission in Canada. I wanted to follow up, does this at all relate to the Labrador Island Link. I know there has been some press reports both about issues with the foundations and also with the wires, obviously the wires aren't your issue. Wondering if you can give us any more color there?

I will talk about Labrador. Nalcor had a management change in Labrador recently, we are in constant contact with our client. Any issues there that may be in the press, for that matter, we are working with the client constantly on different things out there, and the job is going as expected. We don't think there are issues in Labrador. As far as the projects, some of the projects what Derrick was talking about in his comments, is just in general we have some contract terms that we are always working out with our clients, and we are in various stages of that as we move forward through the year.

That was a reference to some of the margin impact in Oil and Gas, not electric.

Got it. Sorry, the term transmission threw me. Real quick on the bidding environment, particularly on the large pipe side. We heard some other people comment maybe I know you said bidding and negotiating is robust, but I'm wondering if some of the big 2017-2018 work, is it being hung up at all just given all of the environmental issues, is that actually slowing the bidding environment or the award activity at all, and do you view that as a challenge?

I think the challenge is trying to predict when it starts. Again, I don't think most of what we are looking at goes, and if it is in the bidding stages or negotiating stage, our clients are pretty bullish on it moving, pip is on the ground. Things are good there. It is just about when it starts, can they get the permits. We have all, and I think the industry has adapted to some of the different regulations from a state standpoint, even with some of the FERC lines, so we have all moved out some. Some FERC lines go in and some don't, and we have taken all of that into account as we look forward, and we will continue to take that into account as we move forward into 2017 and 2018 and beyond.

And if you will indulge me, the two projects that you are still waiting on full notice to proceed in the pipeline. Are those two projects related or unrelated?

The projects that we talked about one project permit is contingent upon another. As soon as one permit goes, the other one goes.

And those are the two you were waiting on?

Yes.

Got it. Thanks for the color.

Yes. Thank you.

Our next question comes from Andrew Kaplowitz with Citigroup.

Good morning, guys.

Good morning.

You talked in your guidance about Oil and Gas margin potentially coming in at the low end of the 5.5% to 7% range that you originally guided to. I know part is just is some extra noise in the first half. But looks like the potential that your delay would just be a part of the cycle. What does your 2016 guidance say about Quanta's ability to get Oil and Gas margins back to the longer term goal of 9% to 12% margin in the segment, and could margins just be potentially be structurally lower this cycle, given some of the issues you mentioned in your gathering business, and maybe some continuing issues in Canada?

Andrew, actually my comments weren't so much to say that we would expect margins to be in the low end of the range. It was just saying that relative to 5.5 to 7%, posting a 7% for the year might be a little more difficult, because of the pressure in the first half of the year. When you think about the last half of the year though, in order for us to get into the upper margin ranges we are talking about overall for Oil and Gas, it is going to require that the third and fourth quarters have margins that are much more substantial than the first half, but those margins will be very near our historical margin guidance. We have often guided Oil and Gas as have the opportunity to be in the 9% to 12% range, based upon the compliment of contributions of large diameter pipe.

As Duke said, we are seeing a large number of large diameter pipe projects moving in the last half of the year, and that is what is bringing us up into that overall margin profile in the back half of the year. Relative to longer term that is what it is, it is the continuing contribution of a robust amount of large diameter pipe, which would be the primary driver moving us towards that range, and as it relates to a 2017, 2018, 2019 view, we are not going to speak to anything from a guidance perspective. But what we say is that when you look at the back half of this year and see how that complement is contributing so much so the margin profile, that continues to be what gives us confidence overall, of being able to move towards that historical 9% to 12% range.

I will comment as well from a general standpoint ,our Oil and Gas the way we bid work, the way we go about executing work has not changed, and when the cycle is in the past we delivered these kind of margins, and I believe we will deliver these kind of margins in this cycle as well.

Okay. Thanks, guys. That is helpful. And then can you separate out for us how much of the loss on the Alaska project was related to the force majeure that was claimed, versus the continuing engineering production issues? At this point, I think I remember you have got some of your best people now on this project, and still having some issues during commissioning. I will think you mentioned that it would end the end of 3Q, which is kind of similar to what you said last quarter, but you also said it was 90% done, which is kind of what it was last quarter as well. I guess what is the risk that this sort of drags on for a little bit longer than we previously thought?

There were three distinct issues in the quarter, all out of our control. We are not going to quantify the claim or what we are pursuing on it. It is early. We are developing it, and it would be not prudent for us to kind of state what that is at this point. We are developing it. Our main concentration is delivering the power plant to the customer, and that is what we are concentrated on right now. We believe we will have it done in the third quarter. Again I know we have said that in the past. We still believe that based on where we are at today. We are in the commissioning phase stage late stages, and have done QAQC on delivery of the whole project. So again, late stages of the project. Yes, we do follow it closely. I follow it myself very closely, so engaged daily on where we are at. I feel like when we get it done and in commissioned, we will start working on the assessment of the claim and where we are at there, and hopefully be able to come back to you and let you know kind of where that is at in.

One other bit of color asDuke mentioned, the three issues, they represented the substantial majority of the changes in the estimate, and therefore the substantial majority of the overall losses we recorded this quarter, which is why you didn't otherwise see a significant move in the estimate to complete, because all three of those items as you referenced, were not currently in our control, and were therefore not in our original estimate.

Understand. Thanks guys.

Our next question comes from William Bremer with Maxim Group.

Good morning, gentlemen.

Good morning, Bill.

Bill.

Not to beat a head horse but if we back out the Alaska project, your electrical margins are above 9%, right?

That's right.

That's right.

Okay, so in essence, what we are seeing here is hey, something these margins are in, are approaching your targeted range. We got one projectthat we are 90% complete, we are almost there. We understand where you are going with this. I want to change, shift a little bit here to the Oil and Gas segment. You mentioned you are gathering. Can you give us an update on downstream? A lot of peers are looking at very good MRO activity now. And really calling out a very robust turnaround season due to a lower crack spread. But what are you seeing on the downstream side. I know we have been talking a lot on mainline, I want to go a little smaller here?

I would say in general our business there is not material to the segment at this point. We do work in turnarounds and also downstream. It is the same cycle. There are delays in some part of it, and some part of it is starting to move on as you said from a turnaround standpoint. So we are participating in some of those, and we do see it, the bidding activity picking up both in Canada and in the lower 48.

Great. And just an update on integrity services, and any additional MSAs in the quarter?

Yes, I mean our integrity business is doing very well. Again, off of the lower base it gets overshadowed by some of the larger diameter pipe. But we continue to grow that base business, both on the LDC markets as well as on the natural gas pipelines and oil lines.

Okay. Great, thank you.

Thanks, Bill.

Our next question comes from Jamie Cook of Credit Suisse.

Hi, good morning. I guess a couple of questions. One, Derrick, back on the guidance again, the back half of the year, the non-GAAP guidance adjusting for all of the charges implies EPS in the back half of the year of $0.55 to $0.60 a quarter, which I don't know when we have ever seen Quanta put up those types of numbers. I guess my concern is, that is a big number. How much cushion do you have in that, can you still make the low end of the those two mainline pipe jobs that you are waiting on permitting? If they get pushed?

And my second question is on the, you have got the two nice projects on the large transmission side in backlog, which I think you said is another $500 million. Given that we are seeing the large transmission projects ramp again, why can't margins as we approach 2017, get back to your targeted range of the 10% to 12%, because your commentary has been small transmission and distribution so that is why your margins weren't there, or were those so competitively bid that is off the table? The third question is you talked about receivables being pushed or something, and you expect to get that back in the third quarter. Can you just give us color on how much that is and why isn't the customer paying you? A dispute over a project, or is it just they can't? Just a little more color there. Thank you.

There is a lot that, Jamie. Let's see if I can remember them all. Oil and Gas, the back half of the year, when we talk about from a confidence perspective as I spoke of earlier, you see the margin profile in Oil and Gas coming back up to margins that are very near our historical 9% to 12%, kind of although at the lower end. And I think what that shows is that despite the level of transmission work that we have going on, we tried to be prudent in the level of expectations of execution, to deal with the risk that there is, inherent in execution of larger projects like this. And so --

But the question is, if those two mainline pipe jobs don't go, can you at least hit the low end of your guide?

It is going to be largely dependent upon how we execute across the remaining portion of that work. Duke spoke of earlier, we will not look at that as individual isolation, because the remaining work might execute above our expectations and therefore be able to cover any shortfall we are pushing on that revenue. If we execute at the current level on the projects that are based upon our guidance, and that project fully moves out, I think that with what you see, is we probably need to come back and look at some level of adjustment, but it is too soon to say. As it stands here today, what we have in our expectations for the year based upon the probability that we believe we will be able to move forward based on customer communications. If something changes from that, we would let you know.

Relative to the T&D margins, the reality is as we stand here today, the biggest pressure in that area is coming from the downturn of the market in Canada. If you were to look at just the non-Canadian operations, the margins in that segment are, as well as ignoring the power plant if you will, the remaining margins are at our historical margin profile. What is putting the pressure overall on the electric power group is the margins coming out of Canada.

To that end that is where as we move forward, we will have the two largest projects the Company has ever been awarded, we believe will be moving into full construction in 2017, and we would expect that alone to create a potential for the margin upside in Canada, which would relieve some of the pressure you are seeing overall on the margins. We are seeing our ability to operate in our historical profile in the non-Canadian market as we stand here today. That is what also then gives us the confidence being able to move into that range as we move forward. What you see in backlog margins are comparable to what you have seen historically. We have not changed our bidding approach on any of the work that is out there that we are pursuing. There is nothing otherwise fundamental occurring.

Lastly on your receivables question QAQC type work or processes. All of the stuff, we have some substantial dollar amounts in sales that are being held up for very minor issues, and it is just a matter of getting the process of QAQC. There isn't anything there that is unique. We have run into that periodically, and we don't expect anything of size or consequence to come out of the issue.

Okay. Thank you. I will get back in queue.

Our next question from Noelle Dilts of Stifel.

Good morning, Noelle.

Good morning. Just on transmission revenues, it sounds like they came in a little bit below your expectations, we are seeing that out of some of the peers as well. I understand that the large projects are coming back, consistent with our expectations. Did you see a slowdown in small to medium project activity or distribution in the quarter, that maybe you weren't expecting? Can you just help us understand that a little bit?

I think some of the we had some fire issues there in Canada, and our Canadian markets did pull back during the quarter. That was where the biggest part of the drag on the earnings were. As far as the lower 48, things progressed basically like we thought they would. A little bit of delay in the large pipeline projects, but we expect that to turn around in the third quarter. So similar to what we thought, yes, the margins are depressed, like I said, we had some issues in Canada that depressed them for the most part.

Okay. Can we talk a little bit just about kind of your longer term strategy, and your priorities for capital allocation, how are you thinking about acquisitions at this point versus additional buybacks? Just give us a flavor of kind of how you are thinking about just your longer term strategy right now?

Yes, we are focused on executing on the core business first and foremost, and safely as well as productivity on the jobs that we have in backlog, and we continue to work with our customers on solutions on their capital structures. As we look at the capital that our customers are going to spend over the next few years, we are just trying to provide solutions to that capital budget in our base business, as well as through larger jobs. We think based on the date that ha we have and what we talked to our customers about, that will bode well for us in our core business. As we look outside our core, again, linear projects and things that our customers are going into, we move along with our customers. The M&A activity, we don't press that. It is more about is it strategic, does it make sense, is this something that we believe will add to our stake holders, and it is a piece of what we believe is a good source and use of capital for our stake holders. As we see it and it makes sense and it is accretive, we would look at acquisitions. Again, we don't have anything large on our plate or anything like that, other than just to say, we are always inquisitive and we are always looking to add to our strategic offerings, as well as geographic mixes in our core business.

Okay, thanks.

Our next question comes from Steven Fisher of UBS.

Thanks, good morning.

Good morning, Steven.

On the pipeline, how long do you expect the bookings to be going forward? This is obviously a light quarter, but we are heading into a more robust market. What kind of visibility do you have on the timing of bookings, could we see a rebound as soon as Q3, or not that soon?

Yes, Steve, I mean again, what I would say characterize it if you look at the way that this quarter went, if we were to early July award on one of our larger electric projects, we would have record backlog, so that alone would tell you kind of the lumpiness in that. So yes, I mean the projects that we are looking at are large, and so they will, your bookings will get lumpy as you move forward. How they go about and when they come, and when we decide to fully put them in backlog, will be based on a couple of things. It is also when they are going to go, when they are probable to go, and so all of the things would very to look at due to regulations and all of other things, now it is a little bit more complicated than it has been in the past. Our northern pass job.

Sorry to interrupt, I was asking about pipelines, not about electric?

Okay. Again, our pipelines same thing. Large projects. And our backlog on the east coast that we are looking at, those that we can't put our hands on to say when they are going to start, when we have a notice to proceed or a contract, we don't put them in our backlog. We are confident that they are there. We are confident in the end markets of our businesses, but we can't, we are not going to put them in the backlog until we sign the contracts, and we can't tell you exactly when that is. It is lumpy. And it will be lumpy.

Okay. If I can just real quick ask you just on electric, what really has changed here? I mean it sounds like for a while, you have been talking about fewer large projects. And the timing of them more uncertain. It does seem there has been a change. What is it about the environment or customer motivations, or what really has made the market a better market?

We stated in the past that some of our resources to build large transmission that we felt like we needed to hold on to those resources, and it has depressed some of our margins in the past. As we move into construction on some of these larger projects as stated, you will start to see our margins increase. That is what you are seeing now. We are starting to get some of these larger projects and execute on them, so that will alleviate some of the margin pressure, and we are pretty optimistic about that moving forward. Our Canadian operations are depressed at this point, we do believe that has stabilized, as that starts to move forward, again the margins will move up. We are watching that with cautious optimism in Canada. I think it is expected and from our standpoint we are executing good on what we have. The environment itself is robust. You can see it in the capital spends of our customers. It is all about when we can come in, and say yes we are going to start this project. It is not about the environment itself. It is a good environment as far as I am concerned.

Okay. Thank you.

Our next question from Andrew Wittmann of Robert W. Baird.

Duke, I will let you finish off what you were about to start there and talk about the update on the Northern Pass project on the electric side that you talked about having won. When can that go into backlog? You mentioned that the large projects are ramping up. Can you talk about your visibility into things like clean line, and maybe what it means for your overall direction in electric backlog over the next two or three quarters?

What I was trying to accomplish is to tell you that overall in general some of these projects are complicated, both on gas and electric when we put them in backlog, and referenced Northern Pass. That is complicated. As we move through that process with our customer, which we stay in contact with all of the time, and they bid into their RFP process, when they get a notice to proceed at their RFP process, then obviously we will stick that in backlog and give you some dates when we will be in construction. Still moving forward as expected. Should see something in late 2017, everything we can hear from our customer, and possibly move it into construction if they win. As we know, we will put it in backlog. Some of the other transmission, we follow it all. We are involved in all of them in some form or fashion for the most part. And again, when they become something that we can talk about meaningfully we will do that. We do not include any of these in the way we think about the business until we put them in backlog. So we are not thinking about that as we look forward in the business, and we don't comment, that is not the reason for the margins moving in electric, for example. If that came in, it would be incremental to anything we are saying.

Just to clarify you said Northern Pass may be late 2017, or did you mean to say late 2016?

No, 2017, it would be a 2017 build, and they wouldn't know until the end of 2017, to what, if they are bidding into the RFP. It is a constant process, but that is a late 2017 type situation in my mind.

That is all I had. Thank you.

Thank you.

Our final question from John Rogers of D.A. Davidson.

Good morning. Thanks for getting me in. A couple of things I just wanted to follow-up on. In terms of the outlook for the second half of the year, and Derrick, your comments about, it sounds like much stronger fourth quarter. I guess are there project closeouts that you are looking at in the fourth quarter, or just a ramp in activity, and now how much do we have to now worry about weather coming into that what seasonally is often a more difficult period?

Actually, it is nothing relative to project closeouts. It is nothing relative to any expectations of recovery of change orders and claims. It is really just the mix of work. In our mind we are going to have an uptick on revenues likely between the third quarter and fourth quarter, most of that being driven by the pipeline division itself in Oil and Gas and the larger diameter pipe. So whether it be from the higher revenue and better absorption of the costs, and/ or just having the full complement of spreads moving at that point in time. Largely ultimately the mix of the work that is happening is what is driving a little bit of that uptick, and we have seen fourth quarter margins be higher than the third quarter in the past. Our typical seasonality is if you have a little bit of weather effect in the fourth quarter, absent anything influencing that in this particular case, what is influencing that is that large diameter mix of work, that is why we think that it will have a slight margin uptick.

Okay. And also revenue uptick as well. Is that what you were saying?

Yes.

Okay. And thenDuke, just back to the bidding environment out there, and with projects being pushed out, particularly on the pipeline side, and you are saying that pricing still looks like it will be what we have seen in the past, and margin potential is still there, but I would surmise that with delays in the market and excess capacity, that the bidding would get more competitive, but you are not seeing that on large projects?

It is more about where the projects are, the kind of constraints you have from a standpoint to build them. Some projects are easier than others. We are seeing it get lumped up into different years, and different parts of years. We take those things into account. It is just the industry itself, and us evaluating when they go. As we said in our comments, I do think that the market in large pipeline is longer, and it is not a boom and bust type thing, because everyone has continued to push a bit. It is just a longer cycle for permitting than it has been in the past. And normally on natural gas, FERC was a fairly easy process. With the states getting involved in that, it has created another level of complexity to get them permitted. We are all working through that, you are starting to see some FERC permits go through. I do believe as we move forward it will get ironed out. It always does, and we will get things moving. We are starting to understand that a little better. As far as competitive levels, the work that we are looking at is core to what we do, the natural gas segment, long haul pipe, and we are very well-positioned in that market. We are not seeing that to be an issue.

Okay. Thank you.

Thank you.

This concludes our question and answer session. I would like to turn the call back over to management for closing remarks.

First I would like to comment just in general, that we are confident in our ability to execute in our core business, and we do think the end markets are robust, and we will continue to strive to deliver on earnings. Thank you for participating in our call. We appreciate your questions, and ongoing interest in Quanta Services. Thank you. This concludes our call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.