Quanta Services Inc (PWR) 2016 Q3 法說會逐字稿

Greetings and welcome to Quanta Services third-quarter 2016 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Kip Rupp, Vice President, Investor Relations. Thank you. You may begin.

Great, thank you. Welcome, everyone, to the Quanta Services conference call to review third-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 emailed to you when they occur, please sign up for email 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 release and other investor materials such as press releases, SEC filings, presentations, videos, audio [cat] 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. 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, November 3, 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 for liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance, or that do not solely relate to historical or current facts.

Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or beyond Quanta's control, and actual results may differ materially from those expressed or implied in any forward-looking statements. 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, 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 third-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 third-quarter results. Following Derrick's comments, we welcome your questions.

We are pleased with the solid third-quarter results we reported this morning compared to the third quarter of last year. Revenues increased approximately 5%. Operating income and margins improved significantly and diluted earnings per share from continuing operations doubled. We are committed to returning our operating margins to historical levels and our third-quarter results demonstrate progress towards that goal and the earnings potential of the Company.

We ended the quarter with record 12-month backlog. I would note that our backlog does not yet include a couple of large projects we have announced, primarily due to their ongoing permitting process. We are confident that these projects will move forward and we'll include them in backlog when we get better visibility into mobilization.

Electric power segment revenues grew approximately 3% during the quarter as compared to the same quarter last year. In addition, excluding the relatively small loss recognized on the Alaska power plant project in the quarter, our electric power segment operating income margins reached 10%. These results were driven by sound execution of our base electric power business. Of note, we had a nominal contribution from the start-up of two larger electric transmission projects we discussed previously on our second-quarter earnings call.

Regarding the Alaska power plant project, in early October we met the contractual performance guarantees required under the contract and have moved into the final punch list completion phase which is on schedule with the previous expectations.

We continue to build our base transmission and distribution business while actively pursuing large multi-year transmission project opportunities. Based on the projects we are executing on and have in backlog, we believe large transmission project revenues should increase in 2017 as compared to 2016. These projects compliment our day-to-day base business operations. In addition, we are in various stages of discussions and negotiations with customers on other large transmission projects that could be awarded over the coming quarters, but we remain cautious on the timing due to permitting uncertainty.

The macro environment in Canada remains challenging for our electric power operations but we are seeing signs of recovery that could have a positive effect going forward. We have taken steps over the past several quarters to adjust the cost structure of these operations. We are pleased with the progress and believe we are well positioned to increase profitability as the markets recover. We compete on our track record for safely executing projects on time and on budget and we will remain disciplined on pricing and project risk. We're okay with not winning them all.

We continue to have a positive long-term outlook for our electric power segment. The end-market drivers underpinning the demand for our electric power infrastructure services are firmly in place, and we believe will remain so for years to come. We expect our base electric power business to continue to grow over time with larger high-voltage electric transmission projects creating opportunity for incremental growth but with some cyclicality.

And finally, in October, Hurricane Matthew hit the southeast coast of the United States, knocking out power to more than 4 million people along its path and significantly damaging property and infrastructure. Quanta deployed more than 1,700 power workers to assist utilities with restoring power to customers impacted by the hurricane. Quanta and the rest of the industry were able to quickly restore power which reflects the benefits of system hardening initiatives that utilities invested in over the past several years. We believe these demonstrated system hardening benefits will continue to drive infrastructure replacement for years to come. Our employees safely responded to help others in need and in many cases put themselves in harm's way to do so. We have the best craftsmen in the world, and they performed at the highest level during this event.

Turning to our oil and gas segment, revenues increased more than 8% versus the same quarter last year and increased more than 29% sequentially. Of note, sequential operating margins increased considerably in the third quarter, primarily due to a significant increase in large pipeline project activity. We expect an improved performance for this segment as we move through 2016, with the second half of the year being meaningfully stronger than the first, driven by a significant increase in large pipeline contributions.

On our second-quarter earnings conference call we discussed two large natural gas pipeline project that were awaiting final permitting before the customer could give us notice to proceed with construction. We began construction on the larger of the two projects, a large natural gas pipeline project in the Southeast United States in mid-September and expect to complete construction in the first half of 2017. We have also begun initial construction activities on the second project, but now expect the majority of the pipeline construction activity to begin early next year rather than this year.

We are currently in construction on 10 large-diameter pipeline spreads across North America and Australia. The vast majority of our current and future pipeline projects we see are designed to move natural gas from the Marcellus and Utica shale regions to various demand centers. While a number of others are intended to support coal to gas generation switching efforts, increase local gas distribution demand and further out the movement of natural gas to the coast lines for LNG export.

For example, in September Dominion announced the Atlantic Coast Pipeline LLC signed a contract with Spring Ridge Constructors LLC to build a proposed 600-mile natural gas Atlantic Coast pipeline. Spring Ridge Constructors is a joint venture of leading pipeline construction companies, including Price Gregory International, a Quanta Services Company.

Pending approval by FERC, the Atlantic Coast Pipeline would run from Harris County, West Virginia, to Robeson County, North Carolina. Construction is scheduled to begin in late 2017 and completion is expected in the second half of 2019. This is a significant project for Quanta and we are pleased to be a part of the joint venture. Because the project is in the permitting and approval process, the project is not yet reflected in our backlog.

In addition, we are experiencing increased levels of discussion with various customers about large pipeline projects in Canada. While some project are encountering permitting and environmental delays, others have received the required government approvals and progressing forward. Despite a difficult regulatory environment, we continue to foresee an active pipeline market for the next several years.

Similar to our electric power segment, we have built and are strengthening the base business in our oil and gas segment which consists of services such as natural gas distribution, pipeline integrity, pipeline logistics management, horizontal directional drilling and engineering. We are positive on the long-term demand jobbers for our natural gas distribution and pipeline integrity services. Increasing natural gas demand and new pipeline safety regulations should continue to drive multi-year opportunities in the natural gas distribution market as pipeline integrity programs continue to accelerate. We have been investing in this business and expanding our operations organically into new markets.

We ended the quarter with nearly 28,200 employees which is a record, and I expect our headcount will continue to increase over the coming quarters. Tracking, training and retaining the workforce we need to safely grow and expand our Company and support our customers over the longer term is critical.

The development of our world-class training facility in LaGrange, Texas, and our training programs at the facility are the cornerstone of these efforts. There is nothing like it in the industry, and we believe the facility and our training programs give us a competitive advantage.

In addition, we have established a business relationship and are developing a workforce development program with Sam Houston State University that provides students with an industry-leading curriculum, build experience and internships for engineering, construction and project management. We believe this relationship and program is an important step to ensuring we have the access to high-quality, well-trained individuals that will become the future of Quanta. In support of this initiative, Quanta has committed to an endowment of $3 million, $2.3 million of which was contributed in the third quarter.

In summary, we delivered solid operating performance in the third quarter and expect the second half of the year to be significantly better than the first, driven by continued execution in our base business and larger electric and pipeline transmission projects that are ramping into construction. While we are now expecting 2016 results to be in the lower end of our prior guidance, this is primarily due to delayed project starts which should benefit us in 2017. We continue to have a positive multi-year view on the end-markets we serve, and we believe we remain well positioned to provide unique solutions to our customers.

While we will provide our formal commentary and 2017 expectations on the fourth-quarter earnings call next February, our qualitative outlook for our business is largely shaped by collaborative relationships with our customers which give us valuable insight into their multi-year infrastructure capital programs. We see increasing activity and opportunity for the award of large high-voltage electric transmission projects over the near and medium term and believe the large pipeline project market remains robust, with a multi-year cycle ahead of us.

As I hope you have taken away from our comments this morning, we are confident that we will finish the year strong, and we are optimistic about the potential we see for 2017 and beyond. We are focused on operating the business for the long term and will continue to distinguish ourselves through safe execution and best-in-class 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 our stakeholders. With that, I will now turn the call over to Derrick Jensen, our CFO, for his review of our third-quarter results. Derrick?

Thanks, Duke, and good morning, everyone. Today we announced revenues of $2.04 billion for the third quarter of 2016 compared to $1.94 billion in the prior-year third quarter. Net income from continuing operations attributable to common stock was $73.1 million or $0.47 per diluted share. These results compared to net income from continuing operations attributable to common stock of $43.2 million or $0.23 per diluted share in the third quarter of 2015. Adjusted diluted earnings per share from continuing operations, as presented in today's press release, was $0.55 for the third quarter of 2016 as compared to $0.30 for the third quarter of 2015.

We did have a few items impacting our results for the quarter. First, as Duke mentioned, we made the $2.3 million contribution to an endowment with Sam Houston State University. Also, we had a slight true-up for costs associated with the power plant project in Alaska that impacted the electric power segment by around $3 million.

Lastly, our tax rate is quite a bit higher, partly due to a lower proportion of income before taxes from international jurisdictions which are generally taxed at lower statutory rates, largely driven by delays in our Latin-American concession work, pushing more of the low tax income into 2017. Also, as part of filing our 2015 federal tax return, we had changes in estimates related to amounts qualifying for the domestic manufacturing tax deduction. Against our original estimate, these items added up to approximately $0.05 to $0.06 for the quarter.

Turning to our broader results, the increase in consolidated revenues in the third quarter of 2016 as compared to the same quarter of last year, was primarily associated with an increase in the number and size of oil and gas projects that moved into full construction during 3Q 2016, as well as increased customer spending for gas distribution services. Also contributing to these increases was the favorable impact of approximately $30 million in revenues from acquired companies, primarily in our electric power infrastructure services segment.

Our consolidated gross margin was 14.8% in the third quarter of 2016 as compared to 12.1% in the third quarter of 2015. This increase is primarily associated with improved margins in our electric power segment which I will discuss later in my prepared remarks.

Selling, general, and administrative expenses were $164.3 million in the third quarter of 2016, reflecting an increase of $18.6 million as compared to the third quarter of 2015. This increase was a result of $11.2 million in higher compensation expenses, largely due to greater incentive compensation costs compared to the prior quarter. We accrue incentive compensation proportionate to the levels of income for the year. Therefore, the third quarter of 2016 has a much higher level of accrual based on the higher operating income as well as the proportion of income the quarter represents to 2016.

In addition, we had $3.1 million in higher costs associated with ongoing technology and business development initiatives. The $2.3 million contribution to the endowment and $1 million in incremental G&A costs associated with acquired companies, net of reduced acquisition costs. Selling, general and administrative expenses as a percentage of revenues were 8% in the third quarter of 2016 as compared to 7.5% in the third quarter of 2015.

To further discuss our segment results, electric power revenues were $1.22 billion, reflecting an increase of $39.3 million when compared to last year's third quarter or approximately 3.3%. This increase was primarily due to approximately $25 million in revenues from acquired companies.

Operating margin in the electric power segment increased to 9.7% in the third quarter of 2016 as compared to 6.5% in last year's third quarter. Our margins for the quarter took a slight hit for the power plant but otherwise reflected solid productivity across most of our electric operations.

Last year's third quarter was impacted by significant delays in larger transmission projects, which at the time, led to an increasingly competitive smaller transmission market because of excess transmission construction resources in the industry. We were also impacted during that time frame as we transitioned resources from larger projects to smaller projects. Although we continue to bear the cost of certain under-utilized large transmission resources and pressure from a more competitive environment for transmission projects, specifically in some regions of Canada, we have adjusted certain of our costs for the anticipated market environment and are better managing transitions between our smaller transmission projects.

On the Alaska power plant project we are continuing the documentation process and related activities to support our claims and recovery efforts to recoup from various parties a portion of the losses previously recognized on the project. While we do not know how successful these efforts will be or the timing of any recovery, we have not recognized any loss recovery on the project to date or forecasted any current recovery. We do not expect to further update on this project or potential recoveries unless matters change materially.

As of September 30, 2016, 12-month and total backlog for the electric power segment increased 2.8% and 2.7%, respectively, when compared to June 30, 2016, due to new contract awards partially offset by normal contract burn.

Oil and gas segment revenues increased quarter over quarter by $63.5 million, or 8.4%, to $819.8 million in the third quarter of 2016. This increase is primarily from an increase in the number of size of projects that moved into full construction in 3Q 2016, as well as increased customer spending for distribution services. Also contributing to the increase was approximately $5 million of revenues from acquired companies.

Operating income for the oil and gas segment as a percentage of revenues increased to 8% in 3Q 2016 from 7.8% in 3Q 2015, and increased significantly from 1.9% in the second quarter of 2016 due to higher revenues associated with large-diameter pipeline projects which typically carry higher margins. 12-month backlog for the oil and gas segment decreased by $35.3 million or 1.4%, and total backlog decreased $85.2 million or 2.5% when compared to June 30, 2016. These decreases were due to the timing of awards as well as expected contract burn during the quarter, partially offset by the positive impact of scope increases to various contracts. Corporate and non-allocated costs were comparable quarter over quarter.

For the third quarter of 2016 operating cash flow from continuing operations used approximately $69.3 million and net capital expenditures were $29 million, resulting in $98.4 million of negative free cash flow as compared to free cash flow of $69.4 million for the third quarter of 2015. Free cash flow for the third quarter of 2016 was negatively impacted by the increased working capital requirements associated with the significant increase in the number and size of oil and gas infrastructure projects that moved into full construction in 3Q 2016.

In addition, last quarter I made mention of some unbilled production that was moving slower than expected through the approval process, with the customer that resulted in our current working capital balance being a bit higher. Although previous discussions with the customer's senior management have proven promising on the amount of billing and collections we would achieve this quarter, the approval process has remained demanding, and in our opinion at times, beyond reason.

Progress on the project overall has created a level of adjustments to the contract value, largely associated with unit adders as defined in the contract which have also contributed to a higher unbilled balance. We have added personnel to manage the meticulous requirements that have been presented, and subsequent to the quarter have continued to receive positive comments from the customer for resolution.

However, during the third quarter these payment delays negatively affected our free cash flow. As of September, the accounts receivable and unbilled balances with this customer represented 11 days of our overall DSO position of 79 days, which compares to DSO of 85 days at September 30 of last year. DSOs are otherwise lower compared to last September due to more favorable up-front billing positions on other contracts.

Cash flows from operations for the nine months ended September 30, 2016, provided approximately $196.9 million and net capital expenditures were $127.3 million, resulting in approximately $69.6 million of year-to-date free cash flow. At quarter end we had $117.4 million in cash. The end of the quarter, we also had $313.3 million in letters of credit and bank guarantees outstanding, and we had $479.7 million of borrowings outstanding under our credit facility, leaving us with approximately $1.13 billion in total liquidity as of September 30, 2016.

Turning to guidance, for the year ending 2016 we expect consolidated revenues to range between $7.65 billion and $7.75 billion. We have lowered our revenue expectations due to delays on several projects which have shifted revenue from 2016 to early 2017, primarily due to permitting delays, as well as some delay due to the rainfall associated with Hurricane Matthew.

The slight reduction in revenue expectations has a corresponding impact on our earnings projection for the year. And after considering the items I previously mentioned that impacted the third quarter, we now anticipate GAAP diluted earnings per share from continuing operations for the year to be between $1.17 and $1.22. We also anticipate non-GAAP adjusted diluted earnings per share from continuing operations to be between $1.51 and $1.56.

Despite some of the project timing impacts, we continue to believe the fourth quarter will be our highest revenue quarter of the year, at or near record levels for the Company. Our current expectations are for electric power revenues to be comparable to last year's fourth quarter, with consolidated revenue growth quarter over quarter being driven by the oil and gas segment.

Although we expect to perform higher levels of storm work in the fourth quarter of 2016, we still expect margins for the electric power segment to be in the low 8% range for the year. A significant number of crews deployed to emergency restoration services associated with Hurricane Matthew left existing customer work. Therefore, the net increase will be tempered. It is too soon to quantify the net effect of storm work as of today. Also, normal seasonality is expected to negatively impact fourth-quarter margins for the segment.

Margins in the oil and gas segment are expected to be near 5.5% for the year. The storm work benefiting the electric power segment in October had a negative impact on the oil and gas segment, delaying start times on certain projects by a couple of weeks, which contributed to our overall lower revenue expectations. Our margin expectations are still intact for these individual projects but the lower contributions to the quarter will somewhat offset the overall contributions of storm work to the consolidated quarter.

We estimate that interest expense will approach $15 million for 2016 and are currently projecting our GAAP tax rate for the year to be around 41.5%. 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 157.3 million weighted average shares outstanding. CapEx for all of 2016 should be approximately $205 million to $215 million. This compares to CapEx for all of 2015 of $210 million.

We are committed to maintaining our strong balance sheet and financial flexibility which positions the Company for continued internal growth and the ability to execute on strategic initiatives. We will continue to focus on the strong cash flow of our base business and concentrate on mitigating the more pronounced fluctuations in cash flow associated with the working capital requirements of larger projects. Overall, our capital priorities remain the same, with a focus on ensuring adequate resources for working capital, capital expenditures and organic growth with an opportunistic approach towards acquisitions and other strategic investments. This concludes our formal presentation and we will now open the line for Q and A. Operator?

(Operator Instructions)

Dan Mannes, Avondale Partners.

Thanks, good morning. First of all, nice quarter, happy to see the margins, particularly in the oil and gas segment. I did want to delve in a little deeper there. When you consider the ramp, particularly on large projects, some of which started late in the quarter, could you help us out with how those could trend over the next couple quarters, assuming normal execution? And also take into account the seasonality, particularly with Canada?

Yes, Dan, in general, as we move into the fourth quarter, obviously we're on those. We've taken seasonality into consideration with those projects. They are large. The risk profiles are different. So I think we've given prudent guidance as we move forward. I will let Derrick talk through it.

Yes, I agree with everything that Duke said. As it relates to rolling past the fourth quarter, Dan, and thinking about seasonality, it is too soon for us to really think about how seasonal plays will play in 2017. Some of these revenues pushing out of the fourth quarter definitely contribute to the first half of 2017, which in many ways would appear as though it bodes well for our quarter-over-quarter comparison in that regard. But I don't know that we have yet made a determination how we think the back half of the year will play out for 2017 otherwise, to be able to comment.

Got it. The second thing I want to ask also in the oil and gas segment is, we're starting to hear some more positive trends, particularly as it relates to drilling activity and certain activities in certain areas. Are you seeing any uplift in terms of the smaller work and gathering work, which I know has been under a lot of pressure for much of this year?

Dan, I think the macro environment on the gas side, underpinning demand of the need for large pipe as you take away from the shale regions in the Marcellus, the Utica, the need for midstream will come back and you'll see some smaller pipe. They are moving different product as well across and into the Gulf Coast.

So, yes, I think it's coming back some. It's not prolific by any means, but the large pipe should overcome any kind of shortfall would you see in that area. And the outlook is good, we continue to bid a lot of work and see a lot of work in that area, so we're optimistic.

Got it. Thanks for the color, guys. Appreciate it.

Noelle Dilts, Stifel.

Thanks, good morning, and again, congratulations on a really nice quarter. I wanted to start on the transmission side of the business. Going back to last quarter, I know if you stripped out some of the charges and looked at the US market, your margins were quite good. It looks like continued progress there this quarter. So could you speak to the trends you are seeing from a profitability standpoint in the US and Canada and how you see that tracking through 2017?

The transmission business, it looks good that the larger projects -- it's the timing so we're always concerned with the timing on the larger projects of our larger transmission business on really both sides of the business. But the electric side we did start some projects. We're on three big projects now. So we're moving forward on some bigger ones.

But the underlying base business, as we'll continue to talk about, is good. There is demand there. We continue to grow that business. We are excited about it. As we stated, where headcount is higher, we will continue to invest in our workforce. So we see the capital spends of our customers. We're talking to them daily. So we're able to understand where they are going. You could look at what they say on their earnings calls, and we believe the capital spends will increase over the next few years, especially that we could see. So the underlying business will continue to grow with some of the larger projects will come in on top of that.

And Canada, just a little bit on that, it's more dependent on your energy, on your oil, and where your oil pricing is. So it's really difficult for us to try to pin that down on where the larger projects are going. We have continued to get our cost structure in line with what the market is. We do have some nice projects in backlog that we believe will move forward in 2017. So we're in pretty good shape for the foreseeable future in Canada.

And Noelle, relative to -- I was just going to color from a margin perspective. You have seen here in the third quarter that if you exclude the power plant, that we're posting a number that's effectively double-digit margins in the electric power segment. We talked about our ability to be back there. That is part because of the cost control efforts in Canada, but it is also because of the strong margins in the US.

The US market as it stands here today for 2016, we are executing at the double-digit margin profile. The pressure for the year is partly coming from MLP obviously, but as well as some of the pressure associated with the Canadian market. But that's where our cost control efforts have predominantly been. As we look forward, we can see the opportunity to be working on a couple of those larger projects in 2017.

So a combination of the cost control and those larger projects we think bode well for Canadian margins, at least to lessen the dilution that's currently being created by Canada. But the US market is still operating well and we think we're very much focused on returning the Canadian margins to a greater benefit.

Thanks, Derrick, that was really helpful. So my second question is a broader question on the pipeline space. I think for anyone following the industry you continue to see headwinds about projects getting pushed out, say six, nine months from 2017 into 2018 or 2018 into 2019. My question for you is, have any of these delays changed how you're thinking about 2017? Or is it par for the course and maybe we're looking at a more extended cycle?

I think we talked about it in the past being broader and longer versus any peaks, and that still holds true. We watched all these larger projects in our gas business and to make sure we give good guidance on when we think they're going to go. We've got it -- we see some pushes. We've built that into our system when we look at things. Some of it, you can't tell when it is coming and it just happens.

But for the most part, I think we have that under control, and we understand when these projects are going to go. It won't allow us to give guidance on a three-month interval, but we should be able to give some qualitative comments that says the macro demand on large-diameter pipe is there. There will be some permitting delays that we'll build into any kind of guidance we give, along with seasonality. But I do think the next few years on large-diameter pipe especially, look really good for us.

Okay, thank you.

Jamie Cook, Credit Suisse.

Hi and congratulations on a nice quarter. A couple questions. Derrick, how dilutive was Canada to earnings this year? And then just a follow-up on that, you talked about within oil and gas, the one project being deferred, was getting pushed into 2017. Can you quantify that? So that's my nit-picky question.

My real question, Derrick or Duke, whoever wants to answer this, I understand you don't want to give specific margin guidance for 2017, but are there any headwinds that -- we can make our own assumptions on the market, are there any headwinds that you know of today that would depress margins in 2017? I'm just thinking we have Alaska, that's gone. We have Canada, which should be less of a headwind, you have restructured. I just don't understand why margins shouldn't be materially higher when we're thinking about 2017 versus 2016. You had the endowment, you're investing in technology. There seems to be a whole bunch of negatives that go away in 2016 that would imply a much EPS number for 2017.

Jamie, on the first part of it, dilutive Canada, I don't know that I could comment to exactly what the operating income-type levels of Canada, but I can tell you that from -- overall Canada, for at least electric power, you are talking about low single-digit margins in comparison. The international revenues right now run about 15% of our consolidated revenues. That includes some Latin-America and some Australia work, but from Canada, that gives you -- let's say that's probably running in the 10% to 15% range. So you can do some backwards math looking at the relative dilution.

Oil and gas pushed the 2017 quantifications. I would tell you that the largest portion of our revenue adjustment for the year is associated with those individual oil and gas projects. And then for margin guidance for 2017 I can color first and just simply say that I think your assessment is not unfair, mainly even if we just look at the elimination of MLP year-over-year. We don't know that we are going to see any sizable moves from a cost structure perspective, from a G&A perspective, so the rest is going to come down largely to execution and the timing of the project. But I will let Duke comment more on that.

Jamie, qualitatively I would say yes everything you said was accurate. We do see good markets in 2017. It comes down to execution, which I'm confident we can execute. So I like the market. I like where we're going. I think the Company is positioned well with boots on the ground. We can build linear construction very, very well. So I'm confident in the Company, and I'm confident in the marks in 2017.

The things that give me pause would only be the Canadian economy and oil pricing there. Concerns me a bit. And then the permitting. So we will be watching some of that as we move forward. But that's only on the large projects. And I will continue to say our base business continues to go the right direction and we see that going in the right direction in 2017.

Okay, thanks. I will get back in queue.

Tahira Afzal, KeyBanc Capital Markets.

Hi, Duke, congrats on an operationally solid quarter.

Thank you, Tahira.

Duke, if you look at your 12-month backlog, it's showing a 5% type of increase. But, if you look at the new work you could potentially book, does that seem to imply that directionally, your revenue growth could be 5% plus? Even in the high single-digits potentially?

Yes, I don't want to get into exactly where, from a percentage. What I do know is that the base business is growing on both segments. What gives us pause on saying there's growth on top is the start to the larger projects. And so we are building our backlog., we continue to build our backlog. It's just the starts and when we put these larger projects in backlog. So in saying that, the larger projects complicates that whole scenario, and we'll continue to be conservative about how we approach that.

Got it, okay, I get that. And Duke, as really a follow-up to that, when we look at some of these pipeline projects and how they're playing out or sizing up, it does seem that your normal seasonality will be somewhat different as we go into 2017. So with civil trade or the unmentionable project really trickling into the first half, would you say that first half is comparatively going to be strong as we see it right now?

Yes, it is, it should. There's no reason why the first half won't be stronger than the first half of this year, based on the work we have ongoing. The concern is the second half and what that looks like. So we'll be trying to provide better guidance here in February on that.

Thank you very much, Duke.

Andrew Kaplowitz, Citigroup.

Good morning, guys, it's Alan Fleming on for Andy this morning. Duke, can you provide an update on pricing in your major businesses? Have you seen any lessening in price competition within electric transmission as some of the large project activity has started to rebound here? Has there been any change in behavior from customers on the main line pipe side as capacity seems like it's gotten a little bit tighter here, especially in the second half of the year?

On the first part of your question, from our standpoint, we're pretty disciplined about how we bid all the time. Our customers, we continue to put the same profile -- we look at risk, is how we price, and so our risk profile has not changed. As we get busier, our utilization rates and things of that nature go up and it allows our margins to enhance. As we get busier, as the larger project are there, we get better utilization.

As we talked about in the past we had people that were on the sidelines that are now going to work on some of these larger projects, or we weren't as efficient on the smaller ones. So you will start to see -- that's why you are starting to see some of the margin enhancement. As well as our base business continues to grow, so that will allow some utilization there.

And our Canadian operations, we have right-sized some of that and we will move forward there. It is really about Canada for us on the margins, to make sure that we get that in line. And some of the projects there, I would say are out of our pricing discipline, and we'll allow the others to win those. And we'll continue to stay disciplined on how we bid work. On the gas side, we continue to bid the same way. It's no different.

Okay. And to follow up on Canada, I think in your prepared remarks you said you are starting to see some signs of a recovery. Can you give us a little more color on what you are seeing that gives you a little bit more optimism there?

I think our backlog -- we have a large project in our backlog, as everyone is aware of, and that will go into construction as we stand today in 2017. So it allows us to get better utilized there and gives us some flexibility on what we do in Canada.

I would say the overall market is contingent on oil pricing in many ways. So as oil fluctuates, so does Canada. So we've watched that as we moved forward and we'll continue to adjust with the markets that we see.

Okay. And Derrick, a question for you on cash flow. It seems like a lot of the weakness this quarter was timing-related in working capital, and obviously this delayed receivable. But how soon do you think we can see a return to more normalized cash conversion levels for you guys?

One of the things that -- the primary thing I don't give guidance on historically has been cash flow because very much of those timing things. I will tell you that here in the fourth quarter, even to the extent that I get better collections on the historic unbilled balances, I think I'm going to have a level of production on that project that such I'm going to be probably flat this quarter versus year end.

So right now I think I'm going to go ahead and say that it wouldn't surprise me if my ending debt balance for the year is fairly comparable to my current debt balance. I think you will see some of that roll more into the first part of next year.

Okay, thank you, guys. Good luck.

Thank you.

Chad Dillard, Deutsche Bank.

Hi, good morning, guys.

Morning.

In transmission, given that you are entering the plus 10% margin territory, and you are in the early stages of ramping up large transmission, I'm just trying to think through the upside scenario for margins over the next year or so. I look back to 2012 time frame and I see the 12% margins. How much of an analog with that time frame to where we are now? And has anything in your business or end-market changed which would either limit you to around 12% or allow you to suppress that previous peak?

Yes, again, the market will be in the 10 to 12 range when things are good, as we've talked about in the past, the double-digit range. So what I would say is, we're taking incremental steps, and it's not something -- it's something that will be incremental to us sequentially as we move along into next year. The market is not -- we're seeing work, we're winning work, we're bidding work. We're also not winning work. So it's hard to say exactly where the margins will go. We will continue to try to get in our historical range.

Relative to 2012, one of the things to point out, is that you may recall that was our largest storm work year, really, in Quanta history. We did over $250 million worth of storm work, so that very much contributed to the margins being over 12%. And at the same time, in that time frame, we were working on a significant number of larger projects, although we do have the opportunity to have larger projects contributing as we go forward. I don't think we're still yet at the level of that. So there are a couple of dynamics that kept us very much on the upper side of that range that, as we look forward would probably say that would be a little aggressive to be thinking that it would be that high in the near term.

That's helpful. And pivoting over to the pipeline side, can you speak to what you are seeing on distribution? What are your customers telling you about planning for 2017, and then how should we think about that?

The distribution business is a good business. It's a steady business. We see the replacement with FENSA and some of the regulation that you see. That's a long-term replacement program across the country. It's broad based. I think will you continue to see that over the next 10, 15 years, and will you continue to see us grow in that business.

Great. Thank you very much.

Thank you.

Andy Whitman, Robert W. Baird.

Great, good morning, guys. I wanted to ask on the pipeline segment, and try to get some context around the opportunities that are out there by asking you if you can give us a sense of the dollar amount of projects that you believe you've won but have been unable to announce. These projects that are held up by permitting or other factors, and what the duration of those that you can best estimate the duration of time that's going to take to get those released?

I think from our standpoint the larger projects, there's many of them out there, it's about which ones go, and to give any sort of guidance on that is very difficult. What I would say is, we can see out fairly long here, and the macro piece of is it there. The underpinning demand is there from a power side. So it's robust environment. It's a robust bidding environment. It's the timing, the permitting and things like that, that's not our expertise, and we can't give guidance on that. What we can say is we do see the Company in a good position to win work and execute work in the next few years.

Okay. An addendum to that last question, then. Can you give us some thoughts about -- have you been seeing more mainline projects coming your way over the last 18 months or so? Or is the body of work that you're looking at potentially doing, is it the same stuff that's been contemplated for many years? In other words, has the oil price declines, has that affected the amount of new work that is coming your way in terms of the opportunity set?

I think if you look at the pipeline business, it's much cheaper to move product through pipe than it is rail. And if you look at what was railed in the past, it becomes uneconomical. So you're starting to see more people put pipelines on the drawing board for where rail lines may have been in the past.

So I think the overall economics of the large pipeline and moving product is there. It continues to be a robust bidding environment and a multi-year bidding environment. So we're having constant contacts with our customers, negotiating, looking at work with them. We like the environment.

Matt Duncan, Stephens.

Hey, good morning, guys.

Good morning.

First question I've got is back on the oil and gas segment for a little bit. Trying to think through the project timing as we look out into next year, certainly not looking for guidance for the year, but really more the flow of what you see in backlog. So you've had some stuff that's pushed into the first half. Sounds like you are going to have a pretty good first half. Atlantic Coast isn't supposed to start until later in the year so it sounds like there's the potential for a little bit of a abnormal flow to the year with an air pocket in the third quarter, which would normally be the high-water mark for the year. Should we be thinking that's the flow of the year unless you pick up a project in between Sabal Trail and other big stuff you're working on and when Atlantic Coast goes?

Yes, again, there's a multitude of projects that we're looking at. We've talked about Atlantic Coast is one of them. We don't necessarily -- we have our own timing in the way that we think about work. I would say the second half is -- we're not started on it yet, so it will take us until February to figure that out when we give guidance. And it's too early to say what the third quarter would look like there. Again, I see the same thing you see when you're looking at it from your viewpoint, so we'll try to be transparent when we give guidance there in February. It's just too early today.

Yes, that helps. Then I want to come back to thinking about margins. So you've laid out targets of 10% to 11% for electrical and 9% to 12% for oil and gas. Electrical, you're now hitting the low end of that with Canada as a drag. And Fort Mac West is going to start up presumably relatively early next year. Is there any reason, going back to what Jamie was asking earlier, is there any reason why you can't get into the 10% to 11% range in electrical next year?

And then with oil and gas, the large-diameter stuff is the best margin work that you do. I understand that there's probably drags from really low profit levels on more of the gathering work you're doing. But, Derrick, if you can help us think through the moving pieces of all these segments, and especially in electrical, I'm having a hard time understanding how you don't get into the 10% to 11% range.

So as it relates to this quarter, and again, you exclude power plant, you saw margins that were in the 10% range. It's important to remember that's also our highest margin quarter, typically from a seasonality perspective. So when you model out how we think the fourth quarter is going to play out, I think you are going to see margins dropping below 10% in the electric power segment because of that seasonality. We think that seasonality will definitely be impacting the quarters of 2017.

For the last few years you have seen a lot less of that seasonal dynamic because of the contributions of Canada. But as we stand here today you see less contributions of Canada, both from a volume perspective, as well as because of the fact that the overall performance of Canada is contributing at a lower margin level.

So though it's too soon to comment as to exactly how guidance will play out, I think those are important factors to think about, when you think about our ability to maintain double-digit margins in every quarter of 2017. I think seasonal impacts will exist, and so we will be putting some level of pressure on our ability to be at that double-digit throughout the year.

Relative to oil and gas, it's a big factor as to when the individual projects start and stop in the individual quarters. Thinking about the second quarter commentary that we provided on the fourth quarter of this year, we talked about the potential for the ability of margins to see an uptick. As we stand here today, we are not seeing that because of the timing of those projects, some of those project pushing out into the fourth quarter.

So any of those individual starts and stops of projects can very much influence the mix of the work in the quarters, and therefore for the year. And that's the biggest portion of what drives the level of margins being up in that double-digit range for oil and gas at this stage. Higher levels at given times in given quarters for those large-diameter pipe can definitely give us the ability to be in there. But as Duke's commentary talked about, too soon to yet comment as to how the back half will play out, to be able to really feel how the ability to be at double-digit margins right now.

I want to come back to what Derrick said on the gas side. The mix of work matters a lot. As our base work in there, the distribution business and all the underlying businesses within that, the seasonality does matter there. So you should be cognizant of that when you are looking at guidance.

Very helpful, guys. Thank you.

You bet.

John Rogers, D.A. Davidson.

Hi, good morning.

Good morning, John.

Just a couple of things. First of all, in terms of the Atlantic Coast Pipeline, getting an award before projects have permits seems somewhat unusual to what we've seen in the past. Is that something that we are going to see over the next couple of years, as people try to lock up capacity in this market? And have you got other projects out there where you're signed up but can't announce yet?

Yes, John, I think in general you could see that happening quite often. It has happened quite often and does happen quite often. So the FERC permit is one piece of it. Traditionally the gas permit has been a process with FERC that's been fairly easy. It is not today. So we'll look at how we put things in backlog and talk about them to the investment community.

And yes, we are looking at large projects on a broad spectrum, both in Canada, Australia and the US, and always have on the front end of these projects. So the environment is good, as I've said. The underpinning demand is there. There's a need for natural gas all across the lower 48, Canada, just from the power plant side as the coal to gas switching happens, you start to see the LDC use more natural gas. We're bullish on the pipe business for the foreseeable future here.

Okay. And then as a follow-up, are you prepared to give us any thoughts or -- relative to telecom business, what you are thinking there?

Yes, what I would say about the telecom business, as we've kind of stated in the past, that we plan on getting in the business. It's a linear construction, we like the business, we see a lot of demand there. And I will leave it at that.

Okay, thank you.

Alex Rygiel, FBR.

Thanks, good morning, gentlemen. Duke, can you comment on how a change in leadership in DC in week could affect the pace of permitting? If so, is that a catalyst in 2017 or later?

Yes, Alex, I don't want to say it can't get any worse, because it's always -- it probably could. So what I would say is that the environment is pretty tough today. The industry has always figured out a way to adapt on any kind of administration. So as the administrations go and come, it does change. It could get better, it could get worse. But the underpinning demand, the need for natural gas, the need for the infrastructure is great. And I'd think under either administration you are going to see infrastructure get built.

Could you spend a minute talking a little bit more about Australia? Is that a marketplace you are emphasizing more? Is it a marketplace that has good margin profile at this time? Or are you de-emphasize that?

No, we like Australia, Alex. Again, we look at that as a long-term growth for Quanta. We'll continue to grow our platform there. We actually made an electric acquisition, a small one, within the quarter, to grow our platform.

So, yes, it's depressed a bit, but I like our operations there. We're doing well in this market especially, and I think you will see us grow that market out. We've stated in the past, if it's not $1 billion, in the $100 million of operating profit, we'll exit that area. So I mean, we're optimistic about Australia, we like it.

Thank you very much.

Thank you.

There are no further questions at this time. I would like to turn the call back to Duke Austin for closing comments.

I would like to thank you all for participating in the third-quarter 2016 conference call. We appreciate your questions and your ongoing interest in Quanta Services. Thank you. This concludes our call.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time and have a great day.